Speculating vs Investing What’s the Difference

Speculating and investing both carry risk. Risk that buying a company, or portfolio of stocks, the values go up as well as down.

Firstly a speculator is in effect a financial gambler. It is hedging, or risking usually large amounts of money in attempt to benefit from either rising or declining market values. The range of investments can vary from company stocks, indices, wine, property indices, property values, market sectors. An investor takes a longer term approach to his or her investments.

The way in which a speculator profits is say on the news or inside information of a company, sector market. So news spreading around the financial newspapers, directors dealings that a company has problems for example Banks, the speculators would rush into buying put options, and benefiting from the hedge against the Banks stock. So here the speculator makes $10,000 say of put options and is therefore selling the companies stock without actually taking a share ownership in the company. By not taking a share stock, the individual is not a stock holder, and as such does not receive profit distribution rights that a stock holder would. In a sense this is a gamble.

Huge amounts of money can be won or lost in speculating. The options are time constrained. This is to say a gamble as such would be on a daily, or on a forward contract basis which is a trade that occurs three months in advance of a specified date. So the speculator on a three month forward basis is tieing his money in a number of ways. There is the initial deposit to open the contract, the market may move in his or her favor that results in a profit being made. Alternatively the market may move against his or her position causing a loss on the initial deposit. The risk is that the market and the stock moving in the opposite direction via the ever changing stock values. Perhaps in speculating this way, extra money is placed to maintain the initial contract without any successat all, or just to try and keep the contract upon, in the hope of a profit at some stage.

Investing on the other hand from my experience and from what I have learned over the years, is that an individual who takes part in the stock market, is in effect trying to buy a number of stock share ownership, in a number of companies. The effect is to have a wide range of diversified stocks. This is to spread the risk as diversely as possible, so that say that in a scenario where a market moves down or sideways, if one of say ten investments go down slightly, the effect of the spread of the stocks owned cancel the loss of one poor performing stock investment. The stock owner is entitled to a dividend payout if it is declared by the company, and also can sell the shares immediately at any time they choose. An investor can vote in shareholder meetings. This is something a speculator can not do.