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Sunday, December 14, 2008

Investment, Speculation, Gambling

What are the differences between investments, speculations and gambling in the stock market?

In my opinion....

Investment:
"I buy into that stock because I believe in its fundamentals. The price is also oversold."
"The technical indicators showed that the price has consolidated, and will be on a upward trend soon."
"I based my purchase on the price to earnings ratio and intrinsic value of the stock."


Speculation:
"I invest in that stock because I think the price will go up. It's intuition."
"Everyone tells me it will go up."
"I have a hunch I will be able to earn within a short time."


Gambling:
"I'm betting that it will go up."
"I don't understand why I'm buying, but I will sell it as soon as it goes up to make a profit."
"I watch the price everyday, hoping it will go up and let me make a quick profit."


An investor knows why he's buying, when he/she made a mistake in purchasing, and learned from the mistakes. Strategies are followed, and rules are set. There's no feelings or emotion for any stock. The company/stock does well, and the investor take it that his/her judgement is correct. But if the company/stock goes bad, the investor will learn from the bad decision, tweak his/her strategies for the better, and use the new strategies for the next investment. Investors thus improve over time.

A speculator or gambler knows little or nuts about what he/she is buying. When a mistake is made, he/she will think: "damn, should have bought at this price, and I would have earned." There are many what-ifs scenarios. The company/stock does well, and the speculator/gambler will give himself/herself a pat on the back and congratulates himself/herself for being "smart". But if the company/stock goes bad, the speculator/gambler will start blaming people he/she believes in, believe that it was just a stroke of bad luck, thinks that it will recover soon. He/she does not have any strategies to tweak, and would most likely not learn any lessons. The cycle usually continues on and on for them.

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