Speculating vs Investing What’s the Difference

Often the terms investing and speculating are used interchangeably and for many the difference between the two is lost. However, in reality there is a fundamental difference between the two. Investing is a strategy over a period of time designed to take advantage of long-term trends in asset prices. Generally, on average, investment assets increase in value over time. Therefore, investing requires patience and time. If you buy an asset and hold it for a long period of time until it appreciates in value, then you are investing.

Speculating on the other hand is a strategy that attempts to take advantage of short-term price fluctuations in assets. Sometimes speculation occurs over a period of time as short as a few seconds or minutes. Speculation is best applied through the use of derivates, which apply leverage to a transaction. Through the use of leverage, you can take a short-term price fluctation and turn it into a big gain, especially if you have a lot of capital. If you buy something and sell it very quickly in hopes of making a gain, then you are speculating (or you can take a short position and then cover youself).

Typically, when talking about investing you hear the phrase “investing for the long-term.” Likewise, with speculation, you may hear the phrase “short-term speculation.” It is unusual to hear someone say “long-term speculation” or “investing for the short-term.” These phrases should help you remember the difference between speculation and investing.