Investing Vs Speculating

Investing and speculating are said to be two different things, and the prudent man is advised to engage in the one and avoid the other. This is something like explaining to the troubled adolescent that love and passion are two different things. He perceives that they are different but they don’t seem quite different enough to clear up his problems. Fred Schwed.

Investing is the purchase of a financial product such as shares and fixed income securities (Time Deposit, Treasury Bills, Commercial Paper etc.) or an item of value such as property with the expectation of gain in the future. In simple terms, investing is using money with the hope of making more money in the future. Investing whether in stocks, fixed income securities or property involves some element of risk, as you may not get back all your money when the investment matures as with fixed income securities or when you decide to sell your shares or property.

Speculation is similar to investing in that the goal is to make more money from your capital. However, the speculator expects much higher gains, takes more risks and has a shorter horizon than the investor. Although speculation tends to be viewed negatively, there is nothing inherently wrong with being a speculator as long as you know what you are doing and are willing to take the risk of being wiped out.

Generally, investing in the stock market is easier than speculating (active trading) because it requires fewer tools and skills, fewer decisions, less time, and the odds are better stacked in your favour.

A speculator must follow the market on a daily basis and be decisive in closing losing positions. An investor on the other hand need not follow the market daily and could decide to keep a loser if the company fundamentals are still solid and the decline is consistent will a general market downturn. For an investor, a weekly review is more than enough. Even a quarterly review of each stock when quarterly earnings are released will do for a well constructed diversified portfolio in a quite market.

I prefer investing to speculating because it is easier and more of a marathon while speculating is more like a sprint that usually leaves me short of breath and sometimes on the verge of collapse. Which do you prefer? Stick to your preference that is more in tune with your personality and do not make one of the common mistakes of speculators; refusing to take a loss by converting a speculative position to a long-term hold.

I hope after reading this the difference between investing and speculating is clearer and you are no longer as troubled as the adolescent.

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