Speculation & Gamblng


Who are Speculators?

The speculators are not genuine investors. They buy securities with a hope to sell them in future at a profit. They are not interested in holding the securities for longer period. Hence, their very object of buying the securities is to sell them and not to retain them. They are interested only in price differentials.
In reality, there is not a hundred percent speculator or an investor. Each investor is to a certain extent a speculator. Similarly, every speculator to a certain extent is an investor. Thus, the difference between the two is a matter of degree only.

Kinds of Speculators

The speculators are classified into four categories such as
1.                   Bull,
2.                   Bear,
3.                   Stag, and
4.                   Lame Duck.
1. Bull: A bull is an optimistic speculator. He expects a rise in the price of the securities in which he deals. Therefore, he enters into purchase transactions with a view to sell them at a profit in the future. If his expectation becomes a reality, he shall get the price difference without actually taking delivery of the securities.
2. Dear: A bear is a pessimistic speculator who expects a sharp fall in the prices of certain securities. He enters into selling contracts in certain securities on a future date. If the price of the security falls as he expects he shall get the price difference.
3. Stag: A stag is considered as a cautious investor when compared to the bulls or bears. He is a speculator who simply applies for fresh shares in new companies with the sole object of selling them at a premium or profit as soon as he gets the shares allotted.
4. Lame Duck: When a bear is unable to meet his commitment immediately, he is said to be struggling like a lame duck.

 

Types of speculative transactions


The various types of transactions, which facilitate speculative dealings, can be classified into the following:
1.                   Option Dealings,
2.                   Margin Trading,
3.                   Arbitrage,
4.                   Wash Sales,
5.                   Blank Transfer,
6.                   Carry Over or Budla Transactions,
7.                   Cornering,
8.                   Rigging the Market.

 

Option Dealings

The term option means a right. Option dealing is an arrangement of right to buy or sell a certain number of specified securities at a predetermined price within a prescribed time limit. Option dealing is a highly risky transaction in securities whose price fluctuates violently. To avoid the risk of loss, the speculators enter into option dealings.
In option dealing, the speculator enters into a contract with another personal thereby acquires the right to deal with him either to buy or sell certain securities at a specified price on a specified date. If he is a bull speculator, he shall enter into purchase options and if the speculator is a bear, he will contract sale options. The speculator should also pay a certain sum of money as consideration. It is known as option money.


However, the speculator has no actual intention to take or to give delivery of the securities, but simply to gain or lose when there is a rise or fall in the prices in future. Thus option dealings have the element of price insurance against fluctuation.

Kinds of Option dealings

Option dealings can be classified into three categories viz.,
1.                   Call,
2.                   Put, and
3.                   Call and Put.
Besides, some authors included Gale option as a separate category.

Margin Trading

Margin trading is a system of purchasing securities with funds borrowed from brokers. For margin trading, the client opens an account with the broker by depositing a certain amount in cash or securities. He also agrees to maintain the margin at a certain level.
The broker will debit the client’s account with the amount of purchases and various charges like brokerage, commission etc. and credit the account with the cash deposited and the sale proceeds. Generally, the price difference is credited or debited as the case may be.

Arbitrage

Arbitrage is a highly specialized and skilled speculative activity. It is undertaken to make profit out of the differences in prices of a security in two different markets. The speculator buys the security in one market where its price is cheaper and sells it in another market where its price is high. These transactions aim to bring about a leveling of prices in two markets.

Wash Sales

Wash sales are fictitious transactions. Under this method, the speculator sells his securities and then repurchases the same through a broker at a higher price. Actually, no transaction takes place in the wash sales. By this process, an artificial demand can be created which mill ultimately, lead to an artificial rise in price. The speculator will then sell the securities at the increased price and makes the profit.

Blank Transfer

It is a method of the transfer without mentioning the name of the transferee in the transfer deed. Blank transfer, in fact, is a routine method of transferring the securities from one person to another. Therefore, it is not a speculative activity. However, it is quite helpful in making speculation in securities easier.
The usual method of transfer is that the transferor i.e. the seller should write the name of the transferee i.e. the buyer and he should pay the stamp duty. But in case of a blank transfer, he simply signs on the instrument of transfer and merely delivers the securities along with the instrument. By this process the shares can be transferred in any number of times and finally any transferee who wants to get the shares registered in his name can submit the blank transfer form along with the security and get them transferred in his name. It saves stamp duty on every transfer.

Carry Over or Budla Transactions

In case of forward delivery contracts, if both the parties agree, the contract can be settled in the next settlement date (probably in the next month or fortnight). Such postponement is called “Carry Over” or “Budla“. This is usually done if the prices move against the expectations of the speculator.

 

Cornering

A corner is the condition of the market in which an individual or a group of individuals holds almost the entire supply of a particular security. The speculators will enter into purchasing contracts with the bears in certain securities. Thereafter, by purchasing substantially the whole of the available securities and getting their actual delivery, the speculator will make such securities to go out of the market. In such an event, he will insist the bear speculators to make actual delivery of the securities, on the fixed date.
The bears will find it difficult to effect actual delivery since such securities have already disappeared from the market. At this stage, the speculator will be able to dictate the terms and the bears in the market are said to “Squeezed“. The bear will now be a lame duck.

 

Rigging the Market

Rigging means artificially forcing up the market price of a particular security. The bull speculators generally carry on this activity. Due to strong bull movement, the price of certain security will go up and a demand shall be created. When the prices rise, they will sell the securities and make the profit. Rigging is another unhealthy practice, which disturbs the free interplay of demand and supply.

 

What is the difference between speculation and gambling?

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 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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