Difference Between Investment and Speculation

• 11 December 2016 | 1478 Views | By Mint2Save

It is uncanny how often investment and speculation are confused by agents, advisors and even the investors. Both these terms, however, stand at opposite poles and completely change the motive regarding which money is used for.

Mismarketing of terms, products is not new to the world of finance and investment-speculation are one such example. Irrespective of this, it becomes very crucial for any investor to understand the difference between these two terms.

In this small article, we are going to differentiate between investment and speculation and elaborate with simple examples.

Terminolgies

Investment is broad term, having found its value in various fields and has not just limited itself to finanace. We would restrict our article to finance only. In the world of finance, investment refers to a well thought, analyzed and feasible process of spending money on an asset, which has a high probability to give higher returns and earn handsome profit.

Yes, investment is mainly focussed on the “End Product: Profit”.

Speculation, on the other hand, is a less  thought short term spend made on merely for a short time in order to fetch quick amount of profit. The main idea of speculation is not focussed on the spend, but on making profit in a short time. Speculation is a highly risky acitivity and even though it focuses on the same end product as investment does, it’s process is not at all aligned towards it.

Elaboration

We are going to understand the elaborate differentiation with the help of an example from the field of real estate.

Ideally, when an investor seeks a spend in the field of real estate, his main focus is not on price, area, locality. He rather focuses on how much return the real estate developer is guaranteeing him.

A fixed rate of return on his investment would be a lot more lucrative to an investor than the tangibility of the investment itself.

Speculator on the other hand, might not even present at all in the field of real estate. This can be owed to the reason that there are hardly any short time buyings and price escalation. If someone is there, who would is involved in the quick buying selling of the properties, he wouldn’t care about any guaranteed returns and neither would guarantee any. His focus might be restricted just towards the commission percent he is going to get upon the buying and quick selling of properties. Speculative spend, hence, as usual, would be very expensive.

Understanding Speculation and Investment in the World of Stock Market

The world of stocks and shares is one peculiar example of mismarketing, when it comes to investor and speculator.

Infact, if you follow any of the popular television channels on Stocks and Finance, you might find the term speculator just out of the picture. On the contrast, almost every tip/idea is indeed a speculation. So, does this mean that stock markets are a field of money exclusively for speculators? Certainly not.

Let’s find out how speculation and investment stand at opposite poles when it comes to Stocks.

Investment into any stock would take into his goals to be reached by that spend. Further, he would consider risk in the sector, the growth of the company, its future plans, dividends etc.

On the other hand, speculator would bet upon its very recent performance or would accomodate his spend by trusting the first line he reads in the newspaper or sees on the TV.

An investement oriented person would have covered the aspects of financial planning, risk management and wealth creation. It does not matter whether he understands the meaning of these terms or not, but his holistic approach would cover all aspects very thoroughly.

Apart from all other factors, an investor has the intangible quality of patience. Lacking patience could and will turn any investor into speculator and vice versa.