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Definition: Speculation involves trading a financial instrument involving high risk, in expectation of significant returns. The motive is to take maximum advantage from fluctuations in the market. Description: Speculators are prevalent in the markets where price movements of securities are highly frequent and volatile. They play very important roles in the markets by absorbing excess risk and providing much needed liquidity in the market by buying and selling when other investors don't participate.
Related Definitions. Markets Live! Follow us on. Download et app. Become a member. Mail this Definition. My Saved Definitions Sign in Sign up. Find this comment offensive? This will alert our moderators to take action Name Reason for reporting: Foul language Slanderous Inciting hatred against a certain community Others. Your Reason has been Reported to the admin. Speculation is a trading activity that involves engaging in a risky financial transaction, in expectation of making enormous profits, from fluctuations in the market value of financial assets.
In speculation, there is a high risk of losing maximum or all initial outlay, but it is offset by the probability of significant profit. Although, the risk is taken by speculators is properly analysed and calculated. Speculation ca be seen in markets where the high fluctuations in the price of securities such as the market for stocks, bonds, derivatives, currency, commodity futures, etc.
At the end of this discussion, it can be said that both are different and should not be used interchangeably. Investors play a very crucial role in maintaining liquidity in the market but speculators too, play a major character in absorbing excessive risk and providing required liquidity, at the time when investors do not participate. Your email address will not be published.
Save my name, email, and website in this browser for the next time I comment. Key Differences Between Investment and Speculation The basic difference between investment and speculation are mentioned in the points given below: Investment refers to the purchase of an asset with the hope of getting returns.
The term speculation denotes an act of conducting a risky financial transaction, in the hope of substantial profit. In investment, the decisions are taken on the basis of fundamental analysis, i. On the other hand, in speculation decisions are based on hearsay, technical charts, and market psychology. Investments are held for at least one year.
Hence, it has a longer time horizon than speculation, where speculators hold assets for short term only. The quantity of risk is moderate in investment and high in case of speculation. As opposed to speculators who expect profit from the change in the prices, due to demand and supply forces.
An investor expects the modest rate of return on the investment. On the contrary, a speculator expects higher profits from the speculation in exchange for the risk borne by him. The investor uses his own funds for investment purposes.
Conversely, speculator uses borrowed capital for speculation. In speculation, the stability of income is absent it is uncertain and erratic which is not in the case of investment.
Lacking clearly understood boundaries, individuals are wandering aimlessly back and forth between the worlds of investing and speculation. And herein lies the danger. The stock market is now dominated by a newly evolved species, the investulator — defined as an investor who unwittingly acquires speculative habits without realizing it. Although more study is needed, it is highly possible being an investulator is the reason why so many individuals perform badly in the stock market.
We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all its dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against.
All posts are the opinion of the author. Tags: Benjamin Graham , Investment vs. Robert G. Hagstrom has more than 30 years of investment experience. To me, speculating has to do with the notion of buying something with the idea that you will trade it to someone else as soon as you can realize a favorable price , while investing would imply a willingness to own that something for an extended period of time without worrying much about the short run or temporary impairments of capital.
A speculator on the other hand seek returns from pure price appreciation. Also in my opinion, an investor sees the stock as a business, while a speculator sees the stock as a ticker symbol. Future income from the asset is considered in the pricing. So that means speculators are also investors? Most people buy BRK shares in the hope that their value will appreciate.
Does that mean buying shares in BRK is speculation? This works for me. A speculator has the same motivations as a house flipper while an investor is like the house buyer who intends to pay off his mortgage. As for me I spend more time speculating but make more money investing. If I can be forgiven I like to use a poker metaphor to describe the difference between investing and speculation.
For me investing is where you are dealt a good hand and slowly increase your stake as the hand improves, seeing how the other players react and how the cards are played, speculation is more a bluff, you are dealt a hand and you can take a guess at how good it may be but you cannot see any future cards, however, you bet large on the chance of a big win regardless of the uncertainty.
A good poker player investor much like in the words of de la Vega, plays a mixture of the two, a mixture of risky bluffs and calculated less risky play. This is perhaps the most important topic of out time. Many times, the value of the business diverges sharply from that of the market…witness the period dot com runup as an example.
If you were the holder of a pension asset during the period, your interests will ill- served by money managers chasing an index so as not to underperform and lose clients. Another way of saying this is to look at vanguard- a firm which indexes for a living. The other comments had some great thoughts as well. Using time span to differentiate between investing and speculating does not capture the essence. The difference is semantic. Investing contains a component of speculating, and speculating contains a component of investing.
The main emphasis in investing is on the value of the assets underlying the investment with the expectation that it will create a desired return i. On the other hand, the main emphasis in speculating is on the price fluctuations with the expectation that it will create a desired return i. Investing is the process of sacrificing the present value of a good be it cash, time or some other type of asset for it to multiply by the underlying growth of an ongoing or future opportunity be it a project, a stock or asset with solid economic fundamentals and approximately measurable risk obtained through thorough analysis and rational behavior.
Speculation is also the sacrifice of the present value of an asset to obtain a benefit from the growth or losses and loss is key of an ongoing or future opportunity. Speculation can or cannot be based on solid fundamentals, thorough analysis and rational behavior. Speculation can have out sized returns or losses due to the uncertain nature of the underlying opportunity, it seeks to exploit volatility.
Since short term volatility tends to be smoothed over time, speculation has a smaller time window. Games of chance are gambling; games of skill are speculating; and games of strategy are investing. The best way to understand this is to look at the definitions. Investors, like Warren Buffett, want to find the underlying value of a company. He cares about the underlying demand of buyers and sellers in the stock.
He is looking at the beauty-contest aspect: will people like the stock and bid it up or not. Focussing on the time frame or the intention takes attention away from a crucial and often forgotten part of the process: The need for someone to take you out of your transaction. I think that if your plan involves eventually selling your asset to someone else, whether that is in 8 seconds or 30 years, then you are speculating, not investing.
They operate on luck, confidence, and Hugo Boss. Those things disappear in that order, but usually they have feathered their nest, not by making a profit for themselves and their clients but by the sure and simple way of taking a commission.
The only way to invest is to invest in yourself and your immediate family. That way has been lost to most, due to the discount people place on future consequences. One could go on and on, but I find it sufficient to say that no one knows what is going to happen in the future, and the farther one sttempts to speculate, the more chaotic are the predictions that any modelling used up to now have supplied.
The distinction becomes especially blurry when you consider a casino owner. It seems clear that owning a business like a casino is a long-term investment. The fact that the odds are in his favor make it seem less speculative. But then how is he any different from the speculative computer with the odds in its own favor that makes thousands of trades per day? Liquidity is the key, in my opinion, to distingusihing between investment and speculation — the source of the liquidity. If we are relying upon the contract and for example collecting the coupons and principal of a bond, the source of liquidity is the obligor under the contract.
If we are relying upon sale of the asset in a market, this is speculation. We are, after all, uncertain that the market may exist or that the price will prove satisfactory. This also delivers a time dimension and shades of grey between these — in general the longer we hold an asset the more income is non-market. I have written a number of articles in the past year on this — happy to send them to anyone who would like to read them — drop me an email at: con.
Investing is the relentless process of translating and refining tacit knowledge into a distinctive and unique investment framework or mental model that is scalable beyond one single person and adaptable in different relevant contextual situations, particularly in dealing with what we do not know. Investors write with a framework as the north star to guide and navigate the marketplace jungle where dangerous animals, poisonous creatures and alluring sirens lurk at the corner. Speculators never bother to write.
Investors care deeply about ideas and research. Investors have an instinctive longing to weave outside our own skin some reflection of our mind. This article worthy for the students who are studying finance and for the people who are somehow connected to stock market.
It gives a basic understanding of investing and speculation in a well defined manner. I think for the most part the difference is that investing consists of investing sum X for a reasonably well-known, predictable return Y: whether Y is coupon payments from a bond, dividends from a stock, royalities from an oil well, rent from real estate.
Speculation is purely price-driven, without expectation that cash or value will otherwise transfer to you from the investment. So in that context, the vast majority of participants in the stock market, including most mutual fund and k participants, are purely speculators. A situation seemingly confusing or complex likely means you have it wrong. Truth is usually pretty simple. It is one of several semantic distinctions we have lost — including journalism vs propaganda in recent decades.
As an equity buyer you do not own the retained earnings. You have the right to sell your security and you have any dividends or yield declared for shareholders. The dividends are your return on your capital investment. No dividends, no investment. I have set this out in dozens of conversations over the past five years and written it in similar quantities of web postings.
I get that the industry does not want its retail customers to get this distinction. And many of those same customers do not want to think they are speculators, speculating on speculations. In many, unfortunately were shocked at their security value declines. Few understand they were all in speculations. Robert, above, got it right about Buffett — he is a hypocrite investor, failing to provide anything more than a speculation to his capital suppliers.
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.
Stock picking is ok, as long as you pick good companies and hold long term. The key is to go into it eyes wide open. But playing with your whole account will lead to disaster. A stock and real estate building has intrinsic value with potential for growth. Crypto does have intrinsic value as a means of peer to peer commerce independent of banks.
Unfortunately it has a huge overlay of speculation which tends to distort that value. In the end I believe the currency will loose its speculation into the options chain. If you buy the FANG stocks are you a speculator? That means stocks are subpar or losers. Speculation and investing may not be so black and white. I never said that stock picking in general is speculating. It is when you look for short term gains from market inefficiencies.
Whether you do that with an index or individual stocks is up to you. My friend basically buys and sells stocks in his retirement accounts. His reply was he needed excitement and that was too boring. Purely speculative and may be a homerun in future or may fizzle out. Investment Vs Speculation. Investments are risk managed, time sensitive ventures independent of market efficiency. Speculation is not. Your email address will not be published.
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Investing can entail building a portfolio of investments. An investor may also invest in alternative assets such as private equity, crowdfunding investments, hedge funds, commodities and futures or precious metals among a host of others. In the context of investing, speculating is akin to taking a "flyer. Speculative investments can also be made into a business venture as well.
A speculative trade can pan out and a nice profit can be made. All too often, however, speculative investments don't pan out and investors lose money on the deal. This is often a function of the risk involved in these speculative options.
This isn't to say those who choose speculative investments don't put in any thought before committing their dollars. Investors will generally have a longer time horizon as compared to speculators. Investors tend to invest with a plan and select investments that will help them fulfill that plan.
Speculators are generally looking for a quicker payout. Speculating usually involves greater risks than investing, but this isn't to say that investing is always a low-risk proposition. Rather, those who speculate tend to be looking for a larger and quicker payout than long-term investors. The road to these types of higher payouts tends to involve riskier, more speculative vehicles.
This might be the use of financial derivatives, options, futures and similar financial instruments. Investors will tend towards more traditional financial instruments like stocks, bonds, ETFs and mutual funds. Not that investors can't lose money here, but things don't generally move as fast as with more speculative vehicles. Certainly, this is a bit of a generalization, but investors tend to take a more basic fundamental approach. Things like asset allocation and fundamental analysis of the investments chosen for their portfolio are common thought processes among investors.
Speculators, on the other hand, might look more at trends, market or investor psychology and related factors in choosing where to put their money. They are hoping to capitalize on these factors for a quick profit. The same person can be both an investor and a speculator. For example, most of an investor's wealth might be tied up in ETFs and mutual funds. Perhaps they have a k plan and some IRA accounts geared to retirement. They can still take a portion of their investible assets and put that money into more speculative vehicles.
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This is a means for traders to speculate upon the price movement of an underlying commodity, raw material or financial instrument. The contract can either be settled in cash or in delivery of the underlying commodity in some cases. 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. Here we discuss the critical differences between investment and speculation along with the infographics and comparative table.
Forgot Password? Differences Between Investment and Speculation Investment is when a security or an asset is purchased with an intention of holding it for a long term period with a view that it will gradually increase in value over that period and speculation can be considered a more risk based transaction where the sole purpose is to make profit out of that transaction which is generally a short term and often a single transaction.
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