Meanwhile, pattern trading uses trends in prices to identify opportunities. Used in technical analysis, investors employ this strategy by looking at past market performance to make predictions about the future of an asset; a feat which is generally very challenging.
Both investors and speculators put their money into a variety of different investment vehicles including stocks and fixed-income options. Stocks or equities represent a certain percentage of ownership in a company. These are purchased on exchanges or through a private sale. Companies are ranked by market capitalization or the total market value of their outstanding shares.
Mutual funds and ETFs are also popular investment options. A mutual fund is managed by a fund manager who uses the pool of money from investors to purchase various assets and securities.
ETFs hold a basket of underlying assets, and their prices change throughout the trading day just like those of stocks. Fixed-income assets include bonds, bills, and notes. These can be issued by corporations or various levels of government.
Many fixed-income assets are used to fund projects and business ventures, and pay interest before they mature, at which time the vehicle's face value is paid back to the investor. For example, a bond issued by the U. Treasury matures at 30 years and pays investors interest bi-annually.
Investors may want to consider the holding period for their investments and their tax implications. The holding period determines how much tax is owed on the investment. This period is calculated from the day after the investment is purchased until the day it is sold or disposed of.
Anything below this is considered a short-term investment. Long-term gains are generally taxed more favorably than short-term ones. In general, the difference between investing and speculating is a long-term versus short-term time horizon. Investing is synonymous with having the intention to buy an asset that will be held for a longer period. Typically, there is a strategy to buy and hold the asset for a particular reason, such as seeking appreciation or income.
Speculating tends to be synonymous with trading because it is more focused on shorter-term moves in the market. You would speculate because you think an event is going to impact a particular asset in the near term. Speculators often use financial derivatives, such as options contracts, futures contracts, and other synthetic investments rather than buying and holding specific securities.
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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Investing Investing Essentials. Investing vs. Speculating: An Overview Investors and traders take on calculated risk as they attempt to profit from transactions they make in the markets. Key Takeaways The main difference between speculating and investing is the amount of risk involved. Investors try to generate a satisfactory return on their capital by taking on an average or below-average amount of risk.
Speculators are seeking to make abnormally high returns from bets that can go one way or the other. Speculative traders often utilize futures, options, and short selling trading strategies. None have dared do it. The media is part of the cool-aid! What is not to like about buying more yield for less?
In the real world who ever invests would invest by considering the possibilities of all risk factors and would form a strategy at least to safe guard the principle amount and to earn a better return i. Speculation: A part of investing, where the investors turns out to be speculators and try to dispose their investments very frequently irrespective of the situation demanded means regardless of the occurrence of the typical phases mentioned in the definition of Investing.
Investments in an economy whose markets are informational and operationally efficient and with no country risk and no exchange risk would let people to be investors with not churning their investments, if not they are speculators. I like the distinction between speculation and gambling. Gambling is when a person places a bet without knowing the odds of winning.
Speculation is when a bet is placed only when the odds of winning are known. At the roulette wheel, I can perfectly calculate the odds of winning. Playing roulette is gambling; there is a percentage chance of winning and losing.
Owning the casino is investment; over the long term, the house always wins and pays a dividend to its owners. Is like the psychological question: What is right or wrong? What is ok for you, I can perfectly find it wrong. But this does not happen in real life. So, lets come back to reality, and try to survive in the cannibal jungle of finance. Regardless of how we are characterized, we commit our money into an asset e.
An investor has more knowledge of the enterprise than the speculator. The investor has perhaps even made himself familiar with the products, finances, and stock behavior. The speculator , on the other hand, might only just know the stock symbol.
The investor convinces himself by the the preponderance of positive information he as learned, or concluded, about the enterprise, that if that continues it can only benefit the value of his holdings in the enterprise. The speculator could care less about the enterprise. He or she expects that some event, preferably in the near future, e. A speculator makes decisions on a story or theory; hoping for price appreciation depreciation.
He is so convicted in his story that he often overlooks the risks. An investor is first and foremost concerned with risk or margin of safety. He makes decisions after determining the intrinsic value of an asset, and never relies on a story or hope.
If you were to buy a private company that has no daily marking of value, what would you focus on to determine its value? Cash flow and free cash flow. Such a position could only be described as speculative. At the time I questioned you about your position in XM Satellite as I felt it was speculative, or at least over priced. After a couple rounds of questions from myself, you finally broke down and admitted that it was speculative, but there was room for a small speculative position in the portfolio.
Curious what you did with that position and how you made out? Speculation is a way of thinking. Some speculators trade financial instruments.
I think we need three concepts: speculation, carry and portfolio. Speculation is the belief that price will change in the future, particularly of a commodity. Some speculations have positive carry, say if you can buy a building with a mortgage and let it out for more than the interest cost. Others have negative carry, like when you buy a gold future which costs more than the spot price or when you play at a roulette table where a zero makes the odds unfavourable.
A dividend on a share is another example of positive carry. A portfolio is a set of speculations with positive carry where you hope that diversification will even out the winning and losing speculations to leave you holding the carry. Portfolio is only one type of investment, but the latter term has a wide application, meaning anything you build in the present for a future payoff.
Beyond differing time horizons and the willingness by investors to analyse a stock as a real asset and not as a piece of paper traded on an exchange, I think one critical distinction between the two breeds is the different perspective investors and speculators takes toward uncertainty and vicissitude of business fortune.
The investor seeks to be guarded against it while speculator seek to profit from it. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Notify me of follow-up comments by email. By continuing to use the site, you agree to the use of cookies.
The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this. By Robert G. Hagstrom, CFA. Posted In: Philosophy. Kenny Yang says:. Jay says:. Bob W says:. Drew Robertson says:. Cameron Lintott says:. Satya says:.
Hyper Critical says:. Pingback: Counterparties: Sequestration nation Felix Salmon. JoeG says:. Matteo Lombardo says:. RD says:. Ian MacLeod says:. Will says:. Con Keating says:. Pingback: Investing vs. Many may consider speculators as dangerous gamblers though they provide the much-required liquidity in the market, which is essential for efficiency in the market.
In certain sectors such as commodities, speculators provide substantial liquidity else the only participants would be the Food companies and the farmers who may have limited ability to invest and assume the risk.
With lesser participants, the bid-ask spread would be more extensive, and harder to find a counterpart in case of trade closure. Speculation can also spike the short-term volatility and risk, thereby inflating prices and lead to asset bubbles similar to the real estate market in the USA. The interest rates were low, and speculators were betting on home prices continuing to rise as more individuals will purchase homes with the help of leverage to sell them when prices rise further at hefty profits.
The selling of homes that followed defines a situation of a speculative market. One should not mix speculation with gambling. Many times both these terms will be used together, giving an impression it means the same, but it is not. Gambling involves putting in money on an event that has an uncertain outcome in hopes of winning more money without any calculation.
It is purely a game of chance with the odds, not necessarily with the gambler. For instance, a gambler will consider a game of American roulette rather than be speculating in the commodities market. However, the payout is only 35 to 1, while the odds against winning are 37 to 1. Though most of the characteristics of investment and speculation overlap each other, one should understand the differences separating each other. One should note that all investments are speculation, but all speculations are not necessarily investments.
The objective of both is to earn profits; only the method involves a difference. There is nothing correct or incorrect in the approach, but it depends on the long-term objective of the individual and the quantum of risk they are willing to bear. The truth of the matter is every activity we perform involves speculation. The individual comes in the open and uses its judgment to forecast the future course of events and act accordingly.
This peculiar psychology makes many investors avoid certain stocks or bonds due to its unforeseen possibilities making investors judge safety by the yield and stability offered.
Hence, one should be aware of the pros and cons of both these situations and keep awareness before arriving at any decision and not solely as an Investment or speculation activity. The element of gambling should also not be neglected entirely, and knowledge of the same should be kept in mind before arriving at any decision. This article has been a guide to Investment vs.
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