A:

Speculation and gambling are two different actions used to increase wealth. However, the two are 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

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.

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 high 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. So if he bets $2 on a single number, his potential gambling income is $70 (35*$2) but the odds of him winning is approximately 1/37.

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