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Post by Aj_June on Nov 9, 2017 20:17:46 GMT
And I should have added in my previous post that investments bring you steady slow of income in form of dividends (for stocks) and coupon payments (for bonds) while gambling does nothing of the sort. While, investment can't make you super rich, it makes a lot of sense if you plan it carefully. Although the definition is sound, investments are more than stocks and bonds which is why I made it a bit more vague. There's really not much of a line in the sand in terms of what can be an investment as long as there can be a rate of return on it. Income doesn't need to be factored until it's sold. As you say, there are investments that that do provide income through ownership. You can also make a good deal of money in relatively fast fashion. Day traders buy and sell stocks incrementally and see small returns everyday that could actually add up to double or triple or more of a return in a matter of months to a year which is all considered short term. House flippers do this too. Both are risky though and are similar to gambling when no research is involved. Yes, income is not necessarily a component in every investment. Most assets that are not stocks and bonds don't pay income stream. More generally, small growth equity don't pay dividends and investors generally buy that for capital appreciation and depend totally on holding period return for gains. But for that to be risky the term "when no research is involved" is key. These very stocks are not risky when you eliminate your non-systematic risk by getting them as a part of your portfolio of over 30 stocks. Also, while it is a belief that people may make a good deal of money in a relatively fast fashion, it happens for very few individual. On average people are not able to make too much return over risk free rate. Of course there are exceptions just as in gambling. There is a lot of misinformation about derivatives even within investment industry. Sure derivatives need to be regulated by government as they involve a lot of speculative trading but the benefits of derivatives are immense. 1. Derivatives involve lower transaction costs than spot transactions. 2. Derivatives help in price discovery by telling you the direction of the underlying. More often than not, market looks at derivatives price as indication of long term price movement for the underlying. 3. Derivatives transactions are usually more liquid than spot transactions 4. Derivatives can help you take short position in underlying that you may not take with assets 5. Some hedging strategy that involves future events can only be implemented through derivatives. The problem with derivatives is that they are very complex and amateurs can find themselves losing a lot while doing speculative trading. Because derivatives involve a lot of leverage people can end up losing a lot of money. There was talk of banning derivatives. But then it is not derivatives fault that people try to make it as gambling. If you do it in educated way you will use derivative to cover your risk exposure. The same is not true about gambling, which is basically full of risk in almost all instances. |
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Post by Aj_June on Nov 9, 2017 20:28:50 GMT
Aj_June , I did not want to imply that gambling and investing were close to identical, merely that at both their cores what you have is the similarity of risking money for a potential reward greater than that risk. In investing, these risks/rewards and the factors that go into calculating their probability are known in a way that, as you say, unless you're extremely foolish you aren't going to lose a ton of money and are much more likely to make money, especially by reducing what risk you can. In most gambling you really don't have that. However, there are certain types of gambling games that are closer to investing in the sense that those with a greater level of knowledge about the game can calculate factors affecting the risk/reward probabilities better than others, and are thus much more likely to win (especially in the long run) the same way one is more than likely to "win" in the long run investing. If this weren't so you wouldn't have professional gamblers, and it's also why you don't see professionals at certain games that are always for the house like roulette. You're also definitely right in noting that there are some ways in which they don't overlap at all, like steady income via investments. While I generally agree with what you said, most of the time investments compensate you for the amount of risk you take rather than offer greater reward than the risk. This is what I wanted to say in my last post. if you want to have no risk you invest in risk free assets such as government treasury bonds or t-bills. But as your demand for return increases, you invest in riskier portfolio. All asset classes offer you return for the risk you entail. If you plot risk and return on two axis then you will find that as average historical returns increases for asset classes, so does the risk. Small stocks in USA provide the most return among the important asset classes but at the same time they have the highest risk. The only exception observed in last 15 years to risk-return takeoff in USA is that government bonds have provided greater return than private bonds in spite of entailing slightly lesser risk. *Also, not just you get return for what risk you take, you only get returns for what market risk (or systematic risk) you take. Market does not compensate you for non-systematic risk as that is a kind of risk you are expected to eliminate by having a diversified portfolio. |
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