Isn’t making investment known as investing? What is speculating? For those who are new to the financial market, there might be doubt about these two activities.
Below are the definitions from Investopedia:
“Investing is the act of committing money or capital to an endeavor (a business, project, real estate, etc.), with the expectation of obtaining an additional income or profit. Investing also can include the amount of time you put into the study of a prospective company.
(Investopedia Definition Link)
Speculation is the act of trading in an asset or conducting a financial transaction that has a significant risk of losing most or all of the initial outlay with the expectation of a substantial gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain, otherwise there would be very little motivation to speculate. It may sometimes be difficult to distinguish between speculation and investment, and whether an activity qualifies as speculative or investing can depend on a number of factors, including the nature of the asset, the expected duration of the holding period, and the amount of leverage.
( Investopedia Definition Link)”
Compare and contrast
Below is a table of comparison of my interpretation of investing and speculating:
| Investing | Speculating | |
| Holding period | Long (months to years) | Short (minutes to days) |
| Risk of loss | Low if done properly | Generally high |
| Return | High if done properly | Can be very high or nothing |
| Research done before committing | Yes | No |
| Nature of activity | Taking calculated risk | Gambling |
| Source of information | Analysis | Hearsay, hunch |
| Dependence on luck | Low | High |
More details
Investing involves doing proper research and committing money to a vehicle based on the gleaned knowledge. In this case, you will have more confidence in your investment. Thus, more work is required for investing.
On the other hand, speculating is a lot like gambling in a casino. You just bet on an outcome and hopes that it will turn out correct. Like gambling, you will know the result real soon. But most often than not, you will lose more than you gain. In speculation, you do not have to do much homework. You will just depend on rumours or your hunch alone.
Luck plays a role in both types of activity. Nonetheless, as speculating resembles gambling, luck plays a major role in it. If you are lucky, you could earn high amount of money in a short period of time. However, luck is a fickle lady. If you depend on chance alone, you might end up losing every cent of your fund.
Same as speculating, luck does play a role in investing, albeit a minor one. If you have done proper research, you would have confidence in the instrument that you invest in. Luck only manifests in the time taken for the price of the instrument to reach your target price. For instance, if you are lucky, the price of the instrument would rise steeply after you have bought the instrument and you could exit it. On the contrary, the price might drop sharply after your purchase and only increase after a long period of time. No matter what, if you have conducted a proper analysis, you would have realized profit as the market will always reflect the true value of an instrument in the end.
In short, always strive to invest instead of speculate!
