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Center for Futures Education, Inc. | The Difference Between Speculators and Gamblers

The Difference Between
Speculators and Gamblers

A speculator is someone who tries to profit from changes in prices of economic goods.  While this is generally done either by buying low and selling high, or selling high and buying back low, the important point is that he/she is using economic goods; i.e., things that are both scarce and useful. Because economic goods are both useful and scarce, they benefit mankind and are universally valued.  People who supply economic goods when and where they are needed perform a valuable service to society (think Wal-Mart, UPS, and Exxon-Mobil, to name a few companies).

In the futures industry in the United States, we started with corn and wheat, and grew to include precious metals, energy products, currencies, interest-rate sensitive instruments, and most recently, futures on the prices of single stocks—all economic goods (or instruments that derive their value from economic goods).  By supplying these goods and determining their prices efficiently, the futures industry performs a valuable service to society.  Not only does it provide a forum for hedgers (people who want to avoid or transfer the inherent risk of price change associated with being in the cash market for economic goods), but it also allocates/distributes its wares to any interested (and financially capable) participants.

Market participants who buy or sell futures contracts in an attempt to earn a profit (speculators) are benefiting society by supplying the economic goods at a market price when they are needed.  Without such a service, supplies could dry up and prices would be determined less efficiently (read: more price volatility).  In short, they supply the capital that is the lifeblood (liquidity) of the markets, and they assume the risk that hedgers want to transfer. Society, as a whole, benefits from the greater market liquidity that speculators provide for all economic goods.

Gamblers, on the other hand, are people who seek out man-made risks; e.g., the roll of dice, spin of a roulette wheel, outcome of a race, sporting event, or card game.  They actually create risk that never existed before they placed the bet. Man-made risks fall under the category of “fun” or “entertainment.”  They are contrived events not based on economic goods.  Without these events, mankind would be a little less entertained, but the flow of economic goods would continue unabated.  Gambling does not benefit society as a whole—only a small class of winners.

It should also be noted that gamblers calculate their odds in an attempt to win bets, while the more successful speculators research supply and demand factors and market price movements for their “commodities.”  The more speculators know about their commodity, the greater their chances of earning a profit.  Knowledge about their market makes a difference.  And if they know enough, along with the use of good money management techniques, they can earn profits consistently.  While some gamblers can win regularly, they primarily do this through good money management techniques, and by calculating the odds of a specific event happening at a certain time.  (This should not be confused with the insurance business, which deals in very large numbers.)  Gamblers’ odds must be calculated anew with each event, while speculators rely on an on-going course of events to determine the “psychology” of the market, and modify their actions accordingly.

The bottom line is that speculators benefit mankind, and gamblers are just seeking a thrill.

© 2007, Inc.

Disclaimer: The information contained on these pages is from sources believed to be reliable. There is no expressed or implied warranty as to the accuracy or completeness of the material. All information is subject to change without notice. Past performance is not necessarily indicative of future results. You should read a "Risk Disclosure Statement" and/or an "Option Risk Disclosure Statement" before trading and should understand the risks associated with futures and options trading. The risk of loss may be substantial. Trading is risky, and many traders lose money. Before trading, one should be aware that with the potential for profits, there is also the potential for losses, which may be large. The information on this web site is not to be construed as trading advice, and should not be relied upon for timeliness as its availability cannot be guaranteed.