Investing vs speculating – What’s the difference between the two?
Investment is putting your money into an asset or financial instrument to earn return and growth on the invested money. Speculation involves the same exercise at a transactional level but has a more immediate effect, in contrast to the long-term horizon that is associated with an investment. In the stock market, a speculator aims to earn a significant profit with high risks attached to a transaction.
Understanding what is investment and what is speculation
The difference between investment and speculation can be understood by looking at their basic features and characteristics.
Purpose – An investment is made to earn a steady return against your money. You will look at the stocks to buy today and invest in them. You will retain these stocks as their share price dip and rise, and expect to earn returns in the form of dividends and price appreciation.
When speculating, you will not be aiming for the share dividend or the long-term price appreciation. If you have invested in X number of shares at Rs 10 per share, you may sell them a few hours later at Rs 11, thus booking a total profit of more than what you invested. You may incur a loss in such a transaction as well if the share price falls. After concluding one such buy-sell transaction, you will move on to the next stock that you aim to profit from.
Time horizon – Investments are made with dividends and growth in mind. So, an investor will invest the money with a long-term horizon in mind. This can be a year or more. An investment over multiple years can derive dividends and decent growth in the case of multi-bagging stocks. Speculators can be intra-day traders who buy and sell within the same day, or for a short-term period. Even speculation in derivatives is traded for a limited period, ranging from a few days to a quarter.
Risk – An investment in the stock market could be risky, particularly in the short and medium terms. This is because of the market forces that influence the performance of shares. However, comparing purely in terms of inherent risk, investments are safer than speculations. This is because volatility is more prominent in short-term speculations. Besides, the stock you speculate in will not get adequate time to recover from a blip in the share market.
Funds used – As an investor, you will use your own funds to invest. Speculation can be carried out even with borrowed funds. Intra-day speculators would be familiar with the concept of margin trading, where the trader is given additional funds by the broker while keeping the bought shares as collateral. The concept of margin is applicable in derivatives trading as well.
Style of investing – Investment is made after exercising adequate caution and research. Factors like the financial performance of a company help an investor to decide. Speculation is done more aggressively, and factors like market sentiment and short-term charts influence speculation decisions.
Expectation – Another key investing and speculating differentiator is the expectation from the money invested. Investors expect a stable and continuous return, while speculators expect a high rate of return in a short period.
If you plan to trade in the stock market today or shortly, a financial expert could help you make an informed decision. Reach out to one today and park your savings smartly!