Investment & Gambling

Asst.Prof .Seena Alappatt Dept of management studies

 Investment & Gambling
• Gambling is unplanned and unscientific,
without knowledge of the nature of the risk
involved.
• It is surrounded by uncertainty and a gambling
decision is taken on unfounded market tips
and rumors.
• In gambling, artificial and unnecessary risks
are created for increasing the returns.
• Ex,horse race, card games, lotteries etc.
 characteristics of gambling
• Gambling is any activity in which money is put at risk
for the purpose of making a profit.
• The important characteristics of gambling are:
 Little or no research has been conducted
 The behavior is risk seeking
 An unsystematic approach is being taken
 Emotions such as greed and fear play a role
 The activity is significantly motivated by
entertainment or compulsion
 No net economic effect results.
 characteristics of Investment
• Investing is any activity in which money is put at risk for the
purpose of making a profit and it is characterized by:
 Sufficient research has been conducted
 The behavior is risk averse
 A systematic approach is being taken
 Emotions such as greed and fear play no role
 The activity is ongoing and done as part of a long term plan
 The activity is not solely by entertainment or compulsion
 Ownership of something tangible is involved
 A net positive economic effect results
 Difference between investing and gambling
1.Tangible vs. intangible
2.Gamble for fun, invest for profit
3.Relationship
4.Recovering of losses
5.Risk
6.Knowledge & skill
Chapter:2 Return & Risk

Asst.Prof.Seena Alappatt Dept.Management Studies

 Return
• A return is the ultimate objective for any investor.
• One of the major objective of investment is to earn
and maximize the return.
• Return on investment may be because of income,
capital appreciation or positive hedge against inflation.
• Income is either interest on bonds or debenture,
dividend on equity or preference shares etc.
• Price change of the investment may lead to capital
gain or loss.
• Hedge against inflation is a positive real rate of return.
• Total return=income received + price change
purchase price of assets
• The return of investment must refers to a
particular period of time.
• Price change is the difference between the price at
the end and the beginning of the period.

rate of return=
Annual income + (price at the end of the year-price at the beginning of the year)
price at the beginning of the year
 Risk

• Higher the unpredictability greater is the risk.

• All investment involve risk of one type or the other.
• The difference between expected return and actual
return is called the risk in investment. Investment
situation may be high risk, medium and low risk
investment;
1.Buying government securities low risk

2. Buying shares of an existing Profit making company Medium risk

3. Buying shares of a new company High risk

• Risk and return are the two sides of the
investment coin.
• Risk is usually associated with the possibility
of not realizing return or realizing less return
than expected.
• The degree of risk varies on the basis of the
features of the assets, investment instruments,
the mode of investment, the issuer of securities
etc.
 Causes of Risks
 Wrong method of investment
 Wrong timing of investment
 Wrong quantity of investment
 Interest rate risk
 Nature of investment instruments
 Nature of company in which the company is
operating
 Creditworthiness of the issuer
 Maturity period or length of investment
 Terms of lending
 National & international factors
 Natural calamities
Types of Risk
 1.Systematic Risk
• Systematic risk refers to that portion of variation in return
caused by factors that effect the price of all securities.
• The effect in systematic return causes the prices of all
individual securities to move in the same direction.
• This movement is generally due to the response to
economic, social and political changes.
• The systematic risk cannot be avoided.
• It relates to economic trend which affects the whole
market.
• The systematic risk cannot be eliminated by diversification
of portfolio, because every share/bond is influenced by
the general market trend.
• Systematic risk arises due to the factors like market risk,
interest rate risk and purchasing power risk.
 2.Unsystematic Risk or Diversifiable risk
• Unsystematic risk refers to that portion of risk which
is caused due to factors unique or related to a firm or
industry.
• This risk is a company specific risk and can be
controlled if proper measures are taken.
• As it is unique to a particular firm or industry it is
caused by factors like labour unrest, management
policies, shortage of power, recession in a particular
industry, consumer preference etc.
• This type of risk is divided into business risk,
financial risk, credit or default risk etc.
 Sources of risk
• 1. Interest Rate Risk:
• Interest rate risk is referred to variability in returns of a
security which result from changes in the level of interest
rates.
• Generally securities are inversely affected by such
changes. This means that the price of security moves
inversely to the interest rate provided other things being
equal. 
• Bonds are more affected by interest rate risk than
common stocks but normally both are affected by
interest rate risk and it is very significant factor of sources
of risk for many investors.
• Market risk: Market risk is considered as the
variability in the returns as a consequence of
fluctuations in the entire market or aggregate
stock market. Mostly common stock is more
affected by market risk but all other securities
are also exposed to that risk. There is wide
range of exogenous factors associated with
the securities that are included in the market
risk like wars, recessions, changes in the
consumer preferences, structural changes in
the economy etc
 3)Purchasing power risk

• Purchasing power risk is also known as

inflation risk.
• It arises from decline in purchasing power on
account of inflation.
 4)Regulatory risk
• Regulatory risk is the risk that a change in
laws and regulations will materially impact a
security, business, sector, or market. A 
change in laws or regulations made by the
government or a regulatory body can increase
the costs of operating a business, reduce the
attractiveness of an investment, or change the
competitive landscape
 5)Business Risk
• The risk of doing business in a particular industry or
environment is called business risk.
• Every company operates with in a particular operating
environment, operating environment comprises both internal
environment within the firm and external environment
outside the firm. Business risk is thus a function of the
operating conditions faced by a company and is the
variability in operating income caused by the operating
conditions of the company
• changes in tastes, changing preferences of consumers, strikes,
increased competition, changes in government policy etc.
 6)Reinvestment Risk

• Reinvestment risk is the risk that future cash

flows—either coupons (the periodic interest
payments on the bond) or the final return of
principal—will need to be reinvested in lower-
yielding securities.
 7)International Risk

• Exchange rate risk, also known as currency risk, is

the financial risk arising from fluctuations in the
value of a base currency against a foreign currency
in which a company or individual has assets or
obligations.
• Country risk: Country risk refers to the uncertainty
associated with investing in a particular country,
and more specifically the degree to which that
uncertainty could lead to losses for investors. 
 8)Liquidity Risk
• Liquidity risk is a financial risk that for a
certain period of time a given financial asset, 
security or commodity cannot be traded
quickly enough in the market without
impacting the market price.
 Diversification
• All investments carry some degree of risk and, as a result,
you can't avoid it completely. But the good news is that risk
diversification can at least help you to avoid over-exposing
yourself to one particular area.
• Diversification is a technique that reduces risk by allocating
investments among various financial instruments, industries,
and other categories.
• It aims to maximize returns by investing in different areas
that would each react differently to the same event.
• Risk diversification can also be important in the business
world. For example, rather than specializing in a single area,
a company may choose to expand into new products and
sectors.