Differentiate Between Investment Speculation And Gambling Finance Essay

Differentiate Between Investment meditation And romp Finance EssayInvestment has different meanings in finance and economics. Finance decoratement is putting m iodiney into something with the expectation of gain, that upon thorough analysis, has a racy school degree of security for the principal amount, as well as security of return, within an expected period of time.1 In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is gambling. position money into something with an expectation of gain with thorough analysis, without security of principal, and without security of return is speculationThis is the ups and downs of the food mart. When the market experiences big swings up and down, especially down, this can puzzle a lot of folks sick. The sicker it makes you feel the more you should look at your portfolio and adjust it so you can handle the wild swings of the market. This could mean that you invest a higher(prenominal) percentage of your portfolio in bonds, which be a less risky type of enthronement.Inflation pretendThe cost of living goes up. If you invest in something that returns 2% and pretension goes up 4% then youve lost 2% of the judge in your investment. My p bents and p bents-in-law thought they would be able to live their retirement years with $100,000.00. Back then, thirties thru 1940s, $100,000.00 made people feel they were rich forever.Opportunity jeopardyOpportunity Risk is when you decide to invest in one type of investment, youre overly deciding non to invest in early(a)s. So if you commit money to a certain investment and it goes down in value, youre stuck in that investment and are not able to participate in another investment that susceptibility be more attractive.This is especially apparent when you obtain your own bonds for instance. You could be stuck in a 10-year bond and you want to get out because of high enkind le rates. You would then be forced to sell for a loss. Its frequently figureter to invest in bond funds because the fund manager has the ability to invest in many different types of bonds.Reinvestment RiskReinvestment Risk has to do with timed investments like CDs and bonds that you purchase yourself. A reciprocal fund manager has the ability to diversify a portfolio of these types of investments by selecting from a larger basket of different types of CDs and bonds to reduce the risk.Concentration RiskDiversification, Diversification, Diversification. Dont concentrate your investment dollars in one type of investment. Read my article here on Diversification.Interest Rate RiskWhen the Fed messes around with the interest rates moving them up and down, the markets react. The value of bonds go up when interest rates go down. The value of bonds go down when interest rates go up. Keeping a well diversified portfolio will reduce the affects the Feds have on your portfolio.Credit RiskThe Credit Crunch is what weve been in lately. The monetary area has taken a hit. The pecuniary sector allows lenders like Countrywide Bank. On another note, Im watching that sector with everyone else because it just might be getting just to pick. Since I write about options at this site thats how Id play it if something comes up that looks interesting.Marketability RiskHaving the ability to sell you investment(s). This pertains to a low interest in stocks, bonds or CDs that you may personally own. By low interest I mean not enough buyers. This is reduced immensely if you invest in a mutual fund.Currency Translation RiskThe value of the dollar goes up and down in the international market depending on what country. This is one reason why its ingenuous to just have 10% of your portfolio in the international market.Timing RiskThe market goes down and you feel uncomfortable about it so you sell one of your investments that you shouldnt sell bad timing.Difference amidst Investment , Speculation The main difference between speculating and investing is the amount of of risk undertaken in the trade. Typically, high-risk trades that are almost akin to gambling fall under the umbrella of speculation, whereas lower-risk investments based on fundamentals and analysis fall into the category of investing. Investors endurek to generate a satisfactory return on their capital by taking on an average or below-average amount of risk. On the other hand, speculators are seeking to make abnormally high returns from bets that can go one way or the other. It should be noted that speculation is not exactly like gambling because speculators do try to make an educated decision on the direction of the trade, but the risk inherent in the trade tends to be significantly above average.The landmark investment is apply to suggest a commitment that is relatively free from certain risk of loss.It is restricted to situations promising dependable income , relatively stable value, a mode st rate of return and a relatively little chance for spectacular capital appreciation. People who seek high income yields or large capital gains are therefore said to forsake investment for speculation.Speculation differs from investment with respect to the limit of the investor i.e the period for which a person is investing and the risk-return characteristics of the investment.An investor is endlessly interest in a good and consistent rate of return for a long period of time. However , a speculator is less interested in shiting very large returns , higher than the normal rate of return , in a improvident time.The word speculate comes from the latin word, speculate meaning to see ahead . Speculation is a reasoned anticipation of future controls. A speculator tries to perceive investment values ahead of the general public. It attempts to organize the relevant knowledge as a support for judgements. Infact , everything we do in this world is a speculation. One must have the courag e to make decisions when the conditions are invidious such as panic , despair or optimism.Most successful speculators operate on a single principle of buying in under wrongd markets and selling out in oerpriced markets. Thus speculation is a deliberate assumption of risks in ventures , which offer the hope of commensurate gains. These expected gains might be much larger than an investment would offer.The speculation are more interested in price gains than in income.Difference between Investment and Gambling agree to most dictionaries , gambling is an art of risk taking without the knowledge of the exact nature of risk. Many people speculate heavily on the strength of tips or gossip and plunge into situation , which they do not understand. This is gambling even though the commitment is of reasonable speculative quantity. Gambling is based on tips , rumours and it is an unknowledgeable and non-scientific act. A gambler risks more than he/she can afford. It is considered to involve the shortest time period and highest risk. Typical examples of gambling are betting on horse go , game of cards , lottery and so onHolding shares for the duration of a stock exchange fortnightly account might be termed as speculation . but to bet on the course of the stock market over the same period with a book maker is considered to be a gambling.Difference between Gambling and SpeculationGambling and Speculation are popular among those who want to make easy money. One cannot deny that money has been ruling the world today. People always thrive to advantage, and the easier it is to earn money, the better. With that mindset comes the popularity of gambling and speculation. But what might we overlook is the fact that even if these devil seems to have the same goal, there is difference between gambling and speculation.GamblingIf you want cash within a snap, maybe gambling can help you with that. When one say gambling, it would usually connote casinos, lotteries and time slot mach ines. 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 sensitive 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.SpeculationIf 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 main points of difference are as followsGambling and speculation are vehicles to profit easily.The probability to succeed in either gambling or speculation is undetermined.The success of a speculator would be because of his skills and knowledge while the succe ss of a gambler would be ascribable to his luck.Gambling can be done without thinking while speculation require in depth study.5. Speculation inescapably a lot more hard work compared to gamblingQ2 What are fiscal Markets with examples? What is the difference between Money Market and dandy Market? apologize in detail one money market instrument and one capital market instrument.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 egress and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods.Structure of fiscal MarketFINANCIAL grocery storeMONEY MARKETCAPITAL MARKETDERIVATIVES MARKETEQUITY MARKETLONG TERM DEBT MARKETFUTURES MARKETOPTIONS MARKETGOVT DEBT MARKETCORPORATE DEBT MARKETSECONDARY MARKETPRIMARY MARKETTypes of financial marketsWithin the financial sector, the term financial markets is often used to refer just to the markets that are used to raise finance for long term finance, the gravid markets for short term finance, the Money markets.Hence we can say that basically there are two types of markets crownwork MarketMoney MarketCapital markets which consist ofStock markets which provide financing finished the issuance of shares or universal stock, and enable the subsequent trading thereof.Bond markets which provide financing through the issuance of bonds, and enable the subsequent trading thereof.Commodity markets, which facilitate the trading of commodities.Capital markets are markets that trade equity (stocks) and debt (bonds) instruments having maturities more than a year. Due to their drawn-out 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.Money markets, which provide short term debt financing and investment. Money market consists ofCertificate of depositTreasury BillsCommercial Papers etcThe 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.) to another economic unit for relatively shorter period.Difference between Money Market and Capital MarketMoney market is distinguished from capital market on the basis of the maturity period, credit instruments and the institutionsMaturity PeriodThe money market deals in the lending and borrowing of short-term finance (i.e., for one year or less), while the capital market deals in the lending and borrowing of long-term finance (i.e., for more than one year).Credit InstrumentsThe m ain 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.Nature of Credit InstrumentsThe credit instruments dealt with in the capital market are more heterogeneous than those in money market. virtually homogeneity of credit instruments is needed for the operation of financial markets. Too much diversity creates problems for the investors.InstitutionsImportant institutions operating in the money market are rally banks, commercial-grade banks, acceptance houses, nonbank financial institutions, bill brokers, etc. Important institutions of the capital market are stock exchanges, commercial banks and nonbank institutions, such as insurance companies, owe banks, building societies, etc.Purpose of LoanThe money market meets the short-term credit needs of business it provides working capital to the indu strialists. 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.RiskThe 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.Basic RoleThe basic subroutine of money market is that of liquid adjustment. The basic role of capital market is that of putting capital to work, preferably to long-term, secure and productive employment.Relation with Central BankThe money market is closely and directly associate with central bank of the country. The capital market feels central banks influence, but mainly indirectly and through the money market.Market RegulationIn the money market, commercial banks are closely regulated. In the capital market, the institutions are not much regulated.Explanati on of Treasury Bills (Money market instrument)Treasury Bills (T-Bills) Treasury Bills, one of the safest money market instruments, are short term borrowing instruments of the Central Government of the Country takingsd through the Central Bank (RBI in India). They are zero risk instruments, and wherefore the returns are not so attractive. It is available both in primary market as well as secondary market. It is a promise to fall in a said sum after a specified period. T-bills are short-term securities that mature in one year or less from their issue witness. 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 assume full face value on maturity.So, when the T-Bills mature, the government behaves the holder its face value. The difference between the purchase price and the maturity value is the interest income realise 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 font 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, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments. Treasury bills are available for a minimum amount of Rs.25K and in its multiples. While 91-day T-bills are auctioned every hebdomad on Wednesdays, 182-day and 364- day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank of India issues a quarterly calendar of T-bill auctions which is available at the Banks website. It also ann ounces the exact dates of auction, the amount to be auctioned and payment dates by publicise press releases prior to every auction. Payment by allottees at the auction is required to be made by debit to their/ custodians current account. T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system. NDS is an electronic platform for facilitating dealing in Government Securities and Money Market Instruments. 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) transactionDebentures ( A Capital Market Instrument)A debenture is a document which either creates a debt or acknowledges it. Debenture issued by a company is in the form of a present acknowledging indebtedness. The debentures are issued under the Companys Common Seal. Debentures are one of a serial 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.Kinds of Debentures(a)Bearer DebenturesThey are registered and are payable to the bearer. They are negotiable instruments and are transferable by delivery.(b) Registered DebenturesThey 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 th e conditions endorsed therein.(c) Secured DebenturesDebentures which create a change on the assets of the company which may be fixed or floating are known as secured Debentures. The term bonds and debentures(secured) are used interchangeably in common parlance. In USA, BOND is a long term contract which is secured, whereas a debentures is an unsecured one.(d) Unsecured or Naked DebenturesDebentures 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.(e) Redeemable DebenturesNormally debentures are issued on the condition that they shall be redeemed after a certain period. They can however, be reissued after redemption.(f) Perpetual DebenturesWhen debentures are irredeemable they are called perpetual. Perpetual Debentures cannot be issued in India at present.(g) Convertible DebenturesIf an option is given to convert debentures into equity shares at the stated rate of exchange after a specified period, they are called cashable debentures. Convertible Debentures have become very popular in India. On conversion the holders cease to be lenders and become owners.Q3 What is the difference between substantive Assets and Financial Assets? Explain in detail three non- marketable securitiesAns Investment instruments or assets or securities are broadly classified into two categories Financial assets and Real Assets.Real assets determine the wealth of an economy , whereas financial assets are merely claims to income generated by real assets . They are represented by report card and can also be termed as paper assets.Real AssetsA 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 bo ilersuit portfolio risk while enhancing your potential for better long-term risk-adjusted returns.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.The types of real assets are as followsGoldOilGoodwillTrade MarksPatentsCopyrights etc.Why invest in Real Assets?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 boilers suit portfolio risk while enhancing your potential for better long-term risk-adjusted returns.What are financial assetsFinancial 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 avocation financial assetsCashCash EquivalentsShort Term InvestmentsAccounts ReceivableCash and Cash EquivalentsCash 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. When corporations need to borrow money for a very short time, they often sell commercial paper. These come due within a few months at most, and pay a higher interest rate than other investments.Short Term InvestmentsShort Term Investments include stocks and bonds that the company intends to hold only for a short time, and then sell and convert back to Cash. We consider it a good practice to convert unneeded cash to an investment account, where it can earn interest, dividends or show capital gains. These are shown on the equipoise sheet at their current m arket value, even if that is higher than the price paid for the investments. This is one of the few times we increase a balance sheet item above its historic cost.Accounts ReceivableCompanies often sell to their customers on credit. The amount the customers owe is called Accounts Receivable (AR). We would record AR at the same time the sale is made, deducting any cash paid at the time of purchase, etc. When customers pay, we subtract the payment from their accounts receivable balance.Most companies use an Accounts Receivable Subsidiary Ledger, which is similar to the General Ledger. The subsidiary ledger contains detailed information about apiece customers account purchases, payments, returns, adjustments, etc. Most companies send statements at the of each month, listing the monthly transactions and ending balance due from each customer.Difference between Real Assets and Financial AssetsWith the advancement of economy , the relative importance of financial assets tends to increase . Even though the real assets differ greatly from financial assets , two forma are complementary and not competitive.The difference between real assets and financial assets can be summarised as followsReal Assets determine the wealth of a parliamentary law or economy whereas financial assets do not represent societys wealth.Real Assets contribute directly to the productive capacity of the economy while the contribution of financial assets to the productive capacity is indirect because they facilitate the transfer of funds to enterprises with attractive investment opportunities.Real assets produce goods and services whereas financial assets define the allocation of income or wealth among investors.Real assets appear only on the asset side of the balance sheet , while financial assets appear on both sides of balance sheet.Investing in real assets carries more risks than investing in paper assets.Non- Marketable SecuritiesSome financial assets are said to be non-marketable because th ey are uncomplete transferable nor negotiable . The investors actually own these assets and cannot buy and sell them in the secondary market.Types of non-marketable securities are as followsBank DepositsThe most popular non-marketable assets held by an investor include deposits with the banks and their saving schemes. There are various types of deposits with banks such as current accounts, saving accounts and fixed deposits . Deposits on current account do not earn any interest whereas bank deposits earn intereest.The interest rate on these deposits vary depending upon the maturity period. Since saving accounts are deposited at regular interval, they have a fixed rate of interest.However , fixed deposits are recurring deposits with varying maturity period.Hence, the rates also vary.FeaturesThey are best known type of investments that offers a high degree of safety on both the principal and the return on that principal.Bank deposits are highly liquid and can be encashed anytime.Loan s can be raised against bank deposits.Non-Negotiable Certificate Of DepositCommercial banks and other financial institution offer a variety of savings certificates known as certificate of deposits (CDs). These instruments are available for various maturities. As the maturity increases , the rate of interest offered also increases. However large deposits may command higher rates , retention maturity constant . The credit risk associated with large CDs depend directly on the credit worthiness of the financial institution that issue them. Since large CDs are not insured , a CD holder may lose principal if the financial institution fails.Money Market Deposit AccountFinancial Institutions offer Money Market Deposit Accounts with no interest rate ceilings.The Money Market Deposit Accounts require a minimum deposit to open. They pay competitive money market rates of interest and are insured by the Federal Deposit Insurance Corporation (FDIC) if the issued bank is insured. Withdrawals can be made , as many times as desired , in person or through automated teller machines (ATMs). There are no limitations on the number of deposits.