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Speculation involves calculating risk and conducting research before entering a financial transaction. A speculator buys or sells assets in hopes of having a bigger potential gain than the amount he risks. A speculator takes risks and knows that the more risk he assumes, in theory, the higher his potential gain. However, he also knows that he may lose more than his potential gain. For example, an investor may speculate that a market index will increase due to strong economic numbers by buying one contract in one market futures contract.
If his analysis is correct, he may be able to sell the futures contract for more than he paid, within a short- to medium-term period. However, if he is wrong, he can lose more than his expected risk. Converse to speculation, gambling involves a game of chance. Generally, the odds are stacked against gamblers. When gambling, the probability of losing an investment is usually higher than the probability of winning more than the investment.
In comparison to speculation, gambling has a higher risk of losing the investment. For example, a gambler opts to play a game of American roulette instead of speculating in the stock market. The gambler only places his bets on single numbers. However, the payout is only 35 to 1, while the odds against him winning are 37 to 1. Although there may be some superficial similarities between the two concepts, a strict definition of both speculation and gambling reveals the principle differences between them.
A standard dictionary defines speculation as a risky type of investment, where investing means to put money to use, by purchase or expenditure, in something offering profitable returns, especially interest or income. To stake or risk money, or anything of value, on the outcome of something involving chance; bet; wager.
Speculation refers to the act of conducting a financial transaction that has a substantial risk of losing value but also holds the expectation of a significant gain or other major value. With speculation, the risk of loss is more than offset by the possibility of a substantial gain or other recompense. A hedger is a risk-averse investor who purchases positions contrary to others already owned.
While speculation is risky, it does often have a positive expected return, even though that return may never manifest. Gambling, on the other hand, always involves a negative expected return—the house always has the advantage. Gambling tendencies run far deeper than most people initially perceive and well beyond the standard definitions. Gambling can take the form of needing to socially prove one's self or acting in a way to be socially accepted, which results in taking action in a field one knows little about.
Gambling in the markets is often evident in people who do it mostly for the emotional high they receive from the excitement and action of the markets. Portfolio Management. If you want cash within a snap, maybe gambling can help you with that. When one say gambling, it would usually connote casinos, lotteries and slot machines.
And every time you gamble, there are only two things you can expect, it is either you win, or you lose. This has been popular because you only have to spend a small amount of money for stakes that are very high. For example, in lottery, the jackpot would amount to millions of dollars, but you can bet for just a couple of bucks. If one wants to increase his chances to profit one might try to speculate.
Speculation is just like investment, you initially put in a capital expecting a profit in return. This is also defined as the act of placing funds on a financial vehicle with the intention of getting satisfactory returns over an amount of time. The stock market is a widely known rendezvous for speculators.
The success of a speculator would be because of his skills and knowledge while the success of a gambler would be due to his luck. Ans :A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods.
Stock markets : which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. Bond markets : which provide financing through the issuance of bonds, and enable the subsequent trading thereof. Capital markets are markets that trade equity stocks and debt bonds instruments having maturities more than a year. Due to their longer maturity , these instruments experience wider price fluctuations , higher credit and interest rate risks than the money market instruments.
In contrast to money markets, capital markets are used for long term investments. They provide an alternative to investment in real assets such as real estate or gold. The need for money market arises because of the immediate cash needs of individuals , corporation and govt do not necessarily coincide with their receipts of cash. The money market enables large sum of money to be transferred quickly and at a low cots from one economic unit business , govt , bank etc.
Money market is distinguished from capital market on the basis of the maturity period, credit instruments and the institutions:. The money market deals in the lending and borrowing of short-term finance i. The main credit instruments of the money market are call money, collateral loans, acceptances, bills of exchange.
On the other hand, the main instruments used in the capital market are stocks, shares, debentures, bonds, securities of the government. The credit instruments dealt with in the capital market are more heterogeneous than those in money market. Some homogeneity of credit instruments is needed for the operation of financial markets. Too much diversity creates problems for the investors. Important institutions of the capital market are stock exchanges, commercial banks and nonbank institutions, such as insurance companies, mortgage banks, building societies, etc.
The money market meets the short-term credit needs of business; it provides working capital to the industrialists. The capital market, on the other hand, caters the long-term credit needs of the industrialists and provides fixed capital to buy land, machinery, etc. The degree of risk is small in the money market. The risk is much greater in capital market. The maturity of one year or less gives little time for a default to occur, so the risk is minimised.
Risk varies both in degree and nature throughout the capital market. The basic role of money market is that of liquidity adjustment. The basic role of capital market is that of putting capital to work, preferably to long-term, secure and productive employment. The money market is closely and directly linked with central bank of the country. In the money market, commercial banks are closely regulated.
In the capital market, the institutions are not much regulated. They are zero risk instruments, and hence the returns are not so attractive. It is available both in primary market as well as secondary market. It is a promise to pay a said sum after a specified period.
T-bills are short-term securities that mature in one year or less from their issue date. They are issued with three-month, six-month and one-year maturity periods. The Central Government issues T- Bills at a price less than their face value par value. They are issued with a promise to pay full face value on maturity. So, when the T-Bills mature, the government pays the holder its face value. The difference between the purchase price and the maturity value is the interest income earned by the purchaser of the instrument.
T-Bills are issued through a bidding process at auctions. The bid can be prepared either competitively or non-competitively. In the second type of bidding, return required is not specified and the one determined at the auction is received on maturity. Whereas, in case of competitive bidding, the return required on maturity is specified in the bid.
In case the return specified is too high then the T-Bill might not be issued to the bidder. At present, the Government of India issues three types of treasury bills through auctions, namely, day, day and day. There are no treasury bills issued by State Governments. Treasury bills are available for a minimum amount of Rs. While day T-bills are auctioned every week on Wednesdays, day and day T-bills are auctioned every alternate week on Wednesdays. It also announces the exact dates of auction, the amount to be auctioned and payment dates by issuing press releases prior to every auction.
T-bills auctions are held on the Negotiated Dealing System NDS and the members electronically submit their bids on the system. RBI issues these instruments to absorb liquidity from the market by contracting the money supply. In banking terms, this is called Reverse Repurchase Reverse Repo. On the other hand, when RBI purchases back these instruments at a specified date mentioned at the time of transaction, liquidity is infused in the market.
This is called Repo Repurchase transaction. A debenture is a document which either creates a debt or acknowledges it. Debenture issued by a company is in the form of a certificate acknowledging indebtedness. Debentures are one of a series issued to a number of lenders. The date of repayment is specified in the debentures.
Debentures are issued against a charge on the assets of the Company. Debentures holders have no right to vote at the meetings of the companies. They are registered and are payable to the bearer. They are negotiable instruments and are transferable by delivery. They are payable to the registered holder whose name appears both on the debentures and in the Register of Debenture Holders maintained by the company.
Registered Debentures can be transferred but have to be registered again. Registered Debentures are not negotiable instruments. A registered debenture contains a commitment to pay the principal sum and interest. It also has a description of the charge and a statement that it is Issued subject to the conditions endorsed therein. Debentures which create a change on the assets of the company which may be fixed or floating are known as secured Debentures.
Debentures which are issued without any charge on assets are insecured or naked debentures. The holders are like unsecured creditors and may see the company for the recovery of debt. Normally debentures are issued on the condition that they shall be redeemed after a certain period. They can however, be reissued after redemption.
When debentures are irredeemable they are called perpetual. Perpetual Debentures cannot be issued in India at present. If an option is given to convert debentures into equity shares at the stated rate of exchange after a specified period, they are called convertible debentures. Convertible Debentures have become very popular in India.
On conversion the holders cease to be lenders and become owners. Real assets determine the wealth of an economy , whereas financial assets are merely claims to income generated by real assets. A real asset is a tangible asset like gold, oil, and real estate.
It has intrinsic value due to its utility. Its value is derived by virtue of what it represents. Real Assets have low correlations to traditional stocks and bonds. Because commodities have low correlations to stocks and bonds, they can be a good choice to lower your overall portfolio risk while enhancing your potential for better long-term risk-adjusted returns. Financial assets include Cash, and those assets that can be converted to cash in a reasonably short period of time — one year at most, but less time in many cases.
We will study the following financial assets:. Cash is just as the word suggests. It includes cash money including paper and coins, checks and money orders to be deposited, money deposited in bank accounts that can be accessed quickly. The term liquid refers to Cash, and the ease or difficulty of converting an asset into Cash. Cash Equivalents are highly liquid short term investments that can be turned into Cash very quickly.
These include US Treasury bills, money market accounts and high grade commercial paper.