Investing vs Speculating
All of us have probably thought of making our money grow. In today’s complex financial markets, you will often hear the terms “investing” and “speculating”. Financial experts always remind prospective investors to know their risk tolerance. But aside from that, there is also another important thing to know. This is to understand the difference between investing and speculating. These terms denote different approaches in making decisions with the investor’s money. They are always used synonymously. Hence, making the line between them unrecognizable. In today’s article, we will discuss investing vs speculating key differences. In addition, their importance.
Investing vs Speculating: Definition
What is Investing?
As defined by the Cambridge Dictionary, investing involves putting money, time, and effort into something to make a profit. While in the financial aspect, investing includes committing capital in an asset to generate an income.
Additionally, investing may entail diversifying investments to build a portfolio. Diversifying means the investor may allocate capital into different ventures. Namely stocks, ETFs, mutual funds, bonds, income-generating real estate, or a combination of any of these.
What is Speculating?
On the other hand, speculating is putting capital into something in the hope of making a profit. It has a greater risk of losing all the capital, however, with an expectation of bigger returns. Speculation is mostly based on theories. Thus, there are no certainties in it.
Investing vs Speculating: Examples
Examples of Investing
Below are the assets that qualify as an investment:
- Cash Equivalents
- Mutual Funds
- Passive Investing
- Government Bonds
- Savings Account
- Retirement Plans
- Private Equity Funds
- Rental Real Estate
Examples of Speculating
Meanwhile, here are the things that fall under speculations:
- Inversed and Leveraged ETFs
- Cryptocurrencies, Bitcoins, Ethereum
- Mining Exploration Stocks
- Short Selling
- Options and future trading
- Startup Investing
- House flipping
Investing vs Speculating: Key Difference
Risk
Did you notice how the term “risk” is defined in both terminologies? Risk is the key difference between investing and speculating. Both differ in the level of risk and the assurance of getting capital returns. Investors are consistently sure they will not lose money. Meanwhile, speculators expect that they might lose their money. Speculating typically involves higher risks than investing. But it does not mean that investing does not have risks. Rather, investors’ expectations of investment risks are lower.
Speculators tend to look for bigger and faster payout than investors. They are after high returns, not high probability returns. Typically, speculators expect the price change in an asset. On the other side, investors look for cash flow or change in the value of an asset. Besides, they tend to commit to traditional assets.
Time Horizon
Investors have a longer time horizon than speculators. They invest in assets for long-term goals. Investors focus on getting security and stable returns. Hence, they plan and carefully select investments. Doing this helps them achieve their financial goals successfully.
Generally, speculators look for quick payouts. Their objective is to make quick returns. Most of the time, it leads to compromising the security of the capital.
Decision Criteria
The investor’s decision process is based on fundamental factors. For example, the financial performance of the company, fundamental analysis of the investment, asset allocation, and others.
Contrarily, speculator’s decision process is more on trends, individual opinion, market psychology, and others. They hope to capitalize on these factors.
Investor Attitude
Considering the points above reflect the difference in attitude between the investors and speculators. The investors’ decision criteria imply a cautious and conservative approach. They carefully consider the investment along with its risk tolerance. On the contrary, speculators believe in an aggressive approach. Because their goal is to get a higher and faster return, they tend to highlight attacks and become careless.
Investing vs Speculating: Comparative Table
Important Note
Do not confuse speculation with gambling. They may imply the same impression, but they are different. Gambling is betting money on an event that does not have a sure outcome. Gamblers hopes in winning money without any kind of calculation. It is a game of chance and luck. Just take the lottery as an example.
Conclusion
Conclusively, speculation, and investing aim to generate profit. But their methods are different. We are not saying that a certain method is correct than the other. If you want to either invest or speculate, there is nothing wrong or the right approach. It depends on your objectives and risk tolerance.
To summarize, knowing the difference between investing vs speculating will help you become aware of future situations. In that way, you can be more careful of any financial decision you will be making. Still, educating yourself is the key.