There is no formula that guarantees success in life, and investing is no exception. Being methodical with your strategy and decisions can raise your chances, but there’s still a possibility that you won’t get the results you want.
With this uncertainty in mind, you might think that investing is nothing more than speculating. However, investing and speculating are two different strategies.
Choosing one method over the other can greatly affect how your money grows or doesn’t grow. Read on to know what makes them different.
Defining investing vs. speculating
Investing is the practice of putting money in an asset with the goal of making a profit over time. Ideally, investors study their options, analyze market trends, and follow a strategy to increase their likelihood of generating returns.
Speculating is the act of buying an asset whose potential to grow in value is heavily based on chance or unpredictable factors. To know if a profit-making venture is merely speculative, here are a few signs to look out for:
- People who invest in it are mainly focused on price movements without seriously considering the asset’s profitability, potential risks, and prospects for growth.
- Performance primarily depends on unknown or uncontrollable factors.
- The investment vehicle is relatively new and lacks comprehensive regulation.
Take note that it’s not just the type of asset that determines whether you’re speculating. People can also speculate on traditional investments.
For example, speculators can drive up the price of a particular stock for no solid reason, like a rumor about the company’s future value. This rumor can cause the price to skyrocket even if there’s no real evidence backing up the claims.
Some traders profit from this rapid growth by selling while the price is on the rise. For others, speculative trading may lead to a loss if they fail to sell an asset before its value declines.
There’s also a chance that the price won’t increase the way they predicted.
What’s the difference?
Here are the key areas where these 2 approaches may differ:
1. Level of risk
Investing always brings a certain amount of risk, but speculating is much riskier for your money. This is because speculations often stem from inflated expectations about an asset’s value.
These expectations may turn out to be false. Speculators also aim for significantly high rates of return and so the risk of loss is just as great.
2. Time horizon
It’s ideal to be patient and practice long-term investing if you want to grow your money for major milestones. Even if you’re investing for a shorter term, there’s still a recommended period for you to hold on to your investments.
Buying and selling typically happens faster for speculators. They need to act quickly and take advantage of price movements and market trends that are often short-lived, and so may end up transacting several times within a day.
3. Decision-making
Sound investing decisions are made based on an investor’s risk appetite, time horizon, and goals. Speculating usually involves more impulse- or sentiment-driven actions.
4. Investment portfolio
To minimize risks, investors must diversify their portfolio with a mix of products that they’ll choose based on careful research. On the other hand, speculators may pick assets based on short-term trends or potential earnings regardless of the risk.
Ultimately, there can be a fine line between investing and speculating. You’ll even find that these terms are sometimes used interchangeably.
Your mindset and goals may determine whether you choose investing or speculating. Just remember to keep your targets reasonable so you won’t expose your money to more risk than you can handle.
