Stock market is sometimes very confusing. You hear people saying ‘bullish’ and might think it isn’t the right place for you. As no one likes to be ‘bullied’. But when you get to know the real meaning of ‘bullish’, you probably won’t leave forever.
Just is the case with a couple of terms you must understand prior to making your first investment. The terms are; investing and speculating. The basic definition would make you think them as types of investment. But they actually aren’t.
‘Investing’ is considered to a type of ‘investment’. While, ‘speculating’ isn’t.
To elaborate further, I’m going to share the key differences between investing and speculating. Differentiating them would also help you make better decisions when planning to invest in stocks.
Let’s start with investing!
‘Investing’ is a process where you investigate the stock before buying it. The investigation is based on some theoretical knowledge and some analytical knowledge. And based on your investigation, you then make a wise decision.
To understand a bit more about ‘investing’, let’s take an example.
Imagine you’re planning to buy AAPL stock (Apple Inc.). You would start by gathering some basic facts:
- What does the company do?
- For how long it has been in the business?
- How long its shares have been publicly traded?
That was the easy part. Now moving towards the more complicated one – analytical knowledge.
It requires the gathering of data based on several years. You need past trends of the share price, dividend payout cycle, and some investor-based financial ratios.
Gathering the data isn’t that hard. But understanding is difficult especially for those with no prior finance education.
Once you have all the related knowledge it would become easier to decide if you want to invest in the stock or not.
All this data collection equips you with the proper knowledge and it minimizes the risk of failure.
Now picture this – if you had planned to buy 1,000 shares of AAPL back in October 2016 when the price was just $27.21. As of now (October 2020), you would have made a gain of more than four times the initial investment – AAPL price on October 29 is $115.32.
I believe you must have understood the idea of investing in stocks. As a starter, you could shortlist stocks of some known companies and compare their past trends. You need to open an account with a stockbroker or you could sign up with an online stock broker to start your journey.
Speculating is apparently like gambling. You risk your investment in an attempt to make a quick gain by investing in an asset with no or little knowledge of the asset. And the investment you made here is only for a short period of time.
Let’s get back to the example of AAPL to understand it clearly.
Imagine you plan to buy 1,000 stocks of AAPL on 29th October for $115.32, expecting growth. But instead of growing, the share starts dropping. And you lose your bet.
While it is just one example, people lose big time trading on such a risky term. However, it isn’t necessarily a loser’s game. People have gained more than their expectations. But this type of investment is highly risky.
Day trading is one good example of speculating. The day traders usually are not well equipped with the necessary knowledge.
Key Difference Between Investors and Speculators
|Long-term investment (at least for a year)||Short-term investment (less than a year, could be just for a day)|
|Focus on the fundamentals||Focus just on trends (share price trends)|
|Play safe by eliminating all the risk they could||Risk their investment (that’s why considered to be gambling)|
|Avoid leveraging||Don’t hesitate to use the leverage|
|Tax friendly||Could charge more tax|
|Can enjoy dividends||Usually do not get dividends|
So why do people still prefer speculating rather than investing? For one obvious reason – speculators, like said earlier, are not well equipped with specific knowledge. And, they usually aren’t regular traders. They prefer taking risks rather than spending time understanding the fundamentals.
Investors, on the other hand, have good knowledge of the stock they intend to buy. They value their investment. Understand that they could get several benefits from their investment like receiving dividends annually, holding shares in a company, and expecting an appreciation in the market value of the shares.
While the choice stays with you, you need to be certain of where you would risk your investment.
Did you know that most of the all-time favorite investors prefer investing for a longer period rather than speculating?