[Company name]

[Document title]
[Document subtitle]

Kazi Rafiqul Islam

Introduction............................................................................................................................2

Speculation.............................................................................................................................2

Gambling................................................................................................................................3

Speculation vs. Gambling......................................................................................................3

Types of Speculators..............................................................................................................3

Speculation and investment....................................................................................................4

Advantages of Speculation.....................................................................................................4

Conclusion..............................................................................................................................5
Topic 2: “Speculation in futures markets is pure gambling.
It is not in the public interest to allow speculators to trade
on a futures exchange”- Explain.
Introduction

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. Some market pros view speculators as gamblers, but a healthy market is made
up of not only hedgers and arbitrageurs, but also speculators. 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.

Speculation

Speculation involves calculating risk and conducting research before entering a financial
transaction. When the securities are bought with the sole object of selling them in future at
higher prices or these are sold now with the intention of buying at a lower price in future, are
called speculation transactions. The main objective of such transactions is to take advantage
of price differential at different times. The stock exchange also provides for settlement of
such transactions even by receiving or paying just the difference in prices.

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.
Gambling

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.

Speculation vs. Gambling

Though speculation and gambling both relies on the benefits from the price change, they are
two different actions used to increase wealth under conditions of risk or uncertainty and very
different in the world of investing. Gambling refers to wagering money in an event that has
an uncertain outcome in hopes of winning more money, whereas speculation involves taking
a calculated risk in an uncertain outcome. Speculation involves some sort of positive
expected return on investment—even though the result may very well be a loss. While the
expected return for gambling is negative for the player—even though some people may get
lucky and win.

Types of Speculators

Speculators takes their decisions based on the price change of product. However, according
to the nature of expectation of expectations speculators can be categorized into two types.
They are-

 1. Bullish speculator

A bullish speculator expects the prices of securities to rise. A bull is a speculator who buys
securities with the hope of selling them at a higher price in the future.

 2. Bearish speculator

A bearish speculator is one who expects the prices of securities to fall in the future. A bearish
speculator sells short securities, aiming to profit from being able to repurchase them at a
lower price at some point in the future.
Speculation and investment

Sometimes the difference between speculation and investment is hard to distinguish. It

1.     Risk Analysis and Risk appetite: Investor will generally rely on the fundamental
analysis of financials and other factors which can affect the price of the asset class and their
decision to invest asset is based upon certain fundamental values associated with the asset.
Investors do have long term risk and return perspective. While speculators generally rely on
the flow of the wind without analysing any fundamentals. Speculators do take higher risk for
expects higher returns in short period. Gambler risk entire capital on bet and relay mainly on
luck. They are the highest risk takers and ready to lose original investment also.

2.     Price of the asset: Investor does not look at the price of the asset rather it looks at the
asset itself to determine the decision to allocate some money now to get some money back
later on. Investor does not get influenced by daily fluctuations of the asset price, because
his/her allocation of money decision is based on the intrinsic value of the assets rather then
price. Speculators look at the price of the asset to allocate the money and they do get
influenced by the daily fluctuations of the price of the assets, aim of the speculator is to get
some quick reward. Gambling is based upon odds and bets are placed only on assumptions.

3.     Time Horizon: Investors allocate money for a particular asset for longer period while
speculators allocate money for shorter period, on the other hand gambler place bet for
immediate gain.

4.     Leverages:  An investor allocates money from its own resources for investment while
and speculators may also rely on borrowed money to allocate. This is applicable mainly to
assets belongs to equity market. Gambler generally allocate their own money and place bet
for entertainment or fun.

Advantages of Speculation

1. Welfare of the economy

Speculators, who are typically willing to take on greater investment risk than the average
investor, are more willing to invest in a company, asset, or security that is unproven or whose
stock is trading at a very low price, during times or in situations where more conservative
investors shy away.

Thus, speculators often provide the capital that enables young companies to grow and
expand, or that provides price support for assets or industries that have temporarily fallen on
financially hard times or out of favour. In such a way, speculators help to support and drive
forward the overall economy.

2. Market liquidity

Speculators add liquidity to the markets by actively trading and by risking their own capital.
A market without speculators would be an illiquid market, characterized by large spreads
between bid and ask prices, and where it might be very difficult for investors to buy or sell
investments at a fair market price. The participation of speculators keeps markets fluid and
always helps facilitate easy exchange between buyers and sellers.

3. Risk bearing

The higher risk tolerance of speculators translates to financing for companies being more
widely and readily available. Speculators are willing to risk lending money to companies,
governments, or business ventures that either lack established credit or that are currently with
poor credit rating. Without speculators, the only businesses able to obtain loans would be
those large, already established firms with a stellar credit rating.

Conclusion

Speculators are important market participants because they add liquidity to the market.
However, contracts must be useful for hedging as well as speculation. This is because
regulators generally only approve contracts when they are likely to be of interest to hedgers
as well as speculators. Speculation and gambling are often linked to each other. Many
speculators gamble their money by selecting trades without much due diligence. On the other
hand, gamblers speculate outcomes all the time. Still, there are lots of differences.
Speculation is used to earn profits in the long term. Gamblers predict things to make profits
in the present. Such differences and more keep things clear that speculating and gambling are
two different activities.