Gambling, Speculation, and Hedging

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GAMBLING AND SPECULATION

A speculation and gambling are two different actions used to increase wealth. However, the two are 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, where as speculation involves taking calculated risk in an uncertain outcome. In India the stock market are often associated with gambling. In many cities, the lane where the future markets – stocks and commodities-are located is called satta bazaar, and those associated with it are labeled as gambler.

SPECULATIONGAMBLING
It is based on knowledge and foresightIt is based on chance of events happening
It is a lawful activityIt is an illegal activity
It performs economic functionsIt has no benefits to offer to the economy
It bears the risk of loss on the basis of logical reasoningIt bears the risk of loss on the basis of blind and reckless expectation
It is based on hope It Make a bet on an uncertain income.
Price speculation is based on rumorsIn gambling, no analysis is done before buying shares
It is based on an event It is based on the game of chance

HEDGING

·       Hedging means reducing or controlling risk. This is done by taking a position in the futures market that is opposite to the one in the physical market with the objective of reducing or limiting risks associated with price changes.

·       Risk reduction is known as hedging. Any investment activity inherently has an element of risk .by using derivative instruments , investors try to minimize risk. Thus, the risk reduction practices of investors using derivative instruments are called as hedging activities.

·       Hedging is a two step process.  A gain or loss in the cash position due to changes in price level  will be countered by changes in value of a future’s position.

·        For example, a wheat farmer can sell wheat futures to protect the value of his crop prior to harvest. If there is a fall in price,, the loss in the market position will be countered by a gain in futures  position.

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