Difference Between Investment and Speculation
Both investment and speculation involve using your money to potentially make more money. But they have different levels of risk and reward. It's essential to understand the difference before deciding how to use your money! The article highlights the meaning of investment and speculation and explores the difference between investment and speculation.
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Comparison Table – Investment vs Speculation
The key difference between investment and speculation is that investment is made in the long term, while speculation aims for the short term. Let us explore other critical difference between the two -
| Investment | Speculation | |
| Definition | Money allocation for an asset purchase. | Short-term bets on financial assets to gain quickly. |
| Aim | The investor’s main objective is to achieve small recurring returns in the long term, such as the payment of dividends. | The speculator seeks to achieve small profits in the short term. |
| Time | Generally, the investor keeps the assets in his portfolio for a long time, years and even a lifetime. | Speculators usually change assets in the short term, in minutes, hours, or a few days. |
| Analysis | Thorough analysis of fundamental factors, including company ratios, competitive and industry conditions, and technical factors throughout the asset’s history. | Technical analysis mainly combined with fundamental and market sentiment. |
| Income Certainty | Stable. | Erratic. |
| Risks | Moderate risk. The lower the risk, the lower the return. | High risk. The higher the risk, the higher the potential gains. |
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What is Investment?
Investment is an asset acquired or invested in to build wealth and save money from the hard-earned income or appreciation. Investment is primarily made to obtain an additional source of income or gain profit from the investment over a specific period.
Investors decide to make investments based on statistical surveying, business experience, reasonable business procedures, and investigation of a marketable strategy.
An example of an investment is buying stocks in a company. When you purchase a company’s shares, you become a part-owner. With the increasing profitability of a company, the share values also tend to increase, allowing you to earn a return on your investment. Some companies also pay dividends as a regular income stream to their shareholders.
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Objectives of Investment
The primary objectives of investment are –
- Keeping funds safe and secure
- Growing the funds
- Earning a steady source of income
- Reducing the income tax burden
- Planning for retirement
- Meeting financial goals
What is Speculation?
Speculation involves buying or selling assets, such as stocks, commodities, or currencies, to profit based on predicted price movements rather than the asset’s fundamental value. Speculation is often considered a high-risk activity as it involves predicting future events, which can be unpredictable and subject to change.
Example – A company invests in a tech startup’s shares, hoping to sell them for a profit in the short term. It may not be interested in holding the shares for the long term but on speculation that the share values will go up, given the company’s positive earnings reports.
In case of an increase in share price, the company could sell them for a profit, generating a gain on the speculation. However, if the share prices crash, the company could incur a loss on the speculation.
In either case, the profits or losses from the speculative transaction would be recorded separately in the company’s accounting records. They would be subject to different accounting rules than the company’s core business activities.
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Objectives of Speculation
The objectives of speculation can vary depending on the individual or institution engaging in it. Here are some common objectives:
- Making profits by buying and selling assets at a higher price than they were bought for.
- Hedging against potential losses in other areas of their portfolio.
- Increasing market liquidity by buying and selling assets can make it easier for other traders to enter or exit positions.
- Leveraging the price discrepancies between different markets or assets, buying low in one market and selling high in another.
- Gathering information about market trends that can be useful for making informed investment decisions in the future.
Conclusion
Investors take a systematic approach to growing their wealth. They invest in assets with reasonable levels of risk in exchange for long-term growth. On the other hand, speculators buy assets that may experience rapid growth but can also lose their entire value in case of a market crash. Both approaches involve making profits. You must know the difference between the two if you plan to widen your financial portfolio, so you can properly manage the level of risk you take against your expected return.
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FAQs
How to identify surplus?
Surplus happens when income exceeds expenses. A surplus exists when the balance of an organization or person is positive.
What is the main objective of investment and speculation?
The investment aims to grow wealth over the long term while minimizing risk. In contrast, the main objective of speculation is to make quick profits by leveraging market fluctuations.
What are the risks associated with speculation?
The risks associated with speculation include potential significant losses and the possibility of being caught up in market bubbles and panics.
What is the power of compounding in investments?
The power of compounding refers to the ability of an investment to generate earnings on both the principal amount and the accumulated interest or gains over time. The investment can grow exponentially by reinvesting earnings, resulting in significant long-term returns.
What should one consider when widening their financial portfolio?
When widening your financial portfolio, you must consider your financial goals, risk tolerance, time horizon, diversification across asset classes and investment strategies, and the costs and fees associated with each investment. Review your long-term investment plan and adjust it regularly to ensure it aligns with your financial goals and objectives.
Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio
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