INVESTING vs. SPECULATING

INVESTING vs. SPECULATING

By Joseph Nguyen

• Investors and traders take on calculated risk as they attempt to profit from transactions they make in the markets.
• The primary difference between investing and speculating is the amount of risk undertaken. High-risk speculation is typically akin to gambling, whereas lower-risk investing uses a basis of fundamentals and analysis.

INVESTING

Investing can come in many different forms—through monetary, time, or energy-based methods. In the financial sense of the term, investing means the buying and selling of financial assets such as stocks, bonds, exchange-traded funds (ETFs), mutual funds, cryptocurrencies, and a variety of other financial products.

Investors hope to generate income or profit through a satisfactory return on their capital by taking on an average or below-average amount of risk. Income can be in the form of the underlying asset appreciating in value, in periodic dividends or interest payments, staking, yield-farming, or in the full return of their spent capital.

Most often, investing is the act of buying and holding an asset for the long term. To classify as a long-term holding, the investor must own the asset for at least one year.

SPECULATING

Speculating is the act of putting money into financial endeavors with a high probability of failure. Speculating seeks abnormally high returns from bets that can go one way or the other. While speculating is likened to gambling, it is not exactly the same but similar, as speculators try to make an educated decision on the direction of their trades. However, the inherent speculative risk involved in the transaction tends to be significantly above average.

These traders buy securities with the understanding that they will be held for only a short period before selling. They may frequently move into and out of a position.

Types of Speculative Traders

Day trading is a form of speculation. Day traders don’t necessarily have any specific qualifications, rather, they are labeled as such because they trade often. They generally hold their positions for a day, closing once the trading session is complete.

A swing trader, on the other hand, holds their position up to about several weeks hoping to capitalize on gains during that time. This is accomplished by trying to determine where a stock’s price will move, taking a position, and then making a profit.