For an investor, it is important to know the difference between investment and speculation. Sometimes Investment Vs Speculation can become a major topic to discuss among all individual investors.

What Is The Difference Between Investment And Speculation?

An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operation not meeting these requirements are speculative. This difference between investment and speculation is given by Benjamin Graham.

The above difference is taken from the book The Intelligent Investor. You can Click Here to read the full summary of this book.

What Is Investment?

An investment is an asset or item that is purchased with the objective that it will grow in value in the future. An investment can be any way that is used to generate a future source of income.

Types Of Investment

You save your money with the motive that it will help you in the future, by investing you multiply your savings and can build great wealth. Here are some lists of investments that you can do in order to increase your financial worth:

• Stocks And Equities
• Debt Mutual Funds
• Fixed Deposits
• Bonds
• Provident funds

Objectives Of Investment

Every investor has their own motive in mind before investing, and each type of investment has its own risks and benefits. Depending on which stage of life the investor is in, there are three main objectives of investment:

• Safety
• Growth
• Income

Advantages Of Investment

How Does Investment Work?

How To Start An Investment?

If today you are thinking to start an investment just follow these easy steps and probably you would be able to start your amazing investment journey.

1. Decide how you want to invest in the stock market
2. Choose an investing account
3. Learn the difference between investing in stocks and funds
4. Set a budget for your stock investment
5. Focus on investing for the long term
6. Manage your stock portfolio

If you want to know all these points in detail please follow this link

How To Invest In Share Market?

To invest in the share market, it is compulsory for you to have a trading account if you want to trade without anybody’s help. Below you can see the trading procedure:

1. Selection Of Broker
2. Opening Demat Account With Depository
3. Placing The Order
4. Executing The Order
5. Settlement [t+2 and t+5/t+7]

10 Best Investors In The World

1. Benjamin Graham
2. John Templeton
3. John Neff
4. Jesse Livermore
5. Peter Lynch
6. George Soros
7. Warren Buffett
8. John Bogle
9. Carl Icahn
10. William H. Gross

5 Best Investment Companies

1. UBS Wealth Management
2. Credit Suisse
3. Morgan Stanley Wealth Management
4. Goldman Sachs
5. Charles Schwab

What Is Speculation?

Speculation is the act of conducting a financial transaction that has a substantial risk of losing the principal value. But sometimes speculation also holds the expectation of a significant gain.

Without the prospect of substantial gains, there would be little motivation to engage in speculation.

Who Are Speculators?

Speculators are people who engage in speculative instruments. In other words, a speculator is a person who buys assets, financial instruments, commodities, or currencies with the hope of selling them at a profit in the future.

So they’re not really all that fundamentally different from other market participants who also enter the financial markets looking for financial rewards. Many people point to the  main difference between investors and speculators as follows:

An investor is concerned with the fundamental value of his investment, whereas a speculator is only concerned with market price movement. In other words, for example, a speculator doesn’t really care if a company is performing well or poorly – only about whether or not he can profit from trading the company’s stock.

Types Of Speculation

1. Bullish speculator

A bullish speculator expects the prices of securities to rise. A bull is a speculator who buys securities with the hope of selling them at a higher price in the future.

2. Bearish speculator

A bearish speculator is one who expects the prices of securities to fall in the future. A bearish speculator sells short securities, aiming to profit from being able to repurchase them at a lower price at some point in the future.

Advantages Of Speculation

1. Welfare of the economy

Speculators, who are typically willing to take on greater investment risk than the average investor, are more willing to invest in a company, asset, or security that is unproven or whose stock is trading at a very low price, during times or in situations where more conservative investors shy away.

Thus, speculators often provide the capital that enables young companies to grow and expand, or that provides price support for assets or industries that have temporarily fallen on financially hard times or out of favor.

In such a way, speculators help to support and drive forward the overall economy.

2. Market liquidity

Speculators add liquidity to the markets by actively trading. A market without speculators would be an illiquid market, characterized by large spreads between bid and ask prices, and where it might be very difficult for investors to buy or sell investments at a fair market price.

The participation of speculators keeps markets fluid and helps facilitate easy exchange between buyers and sellers at all times.

Disadvantages Of Speculation

1. Unreasonable prices

Speculation can sometimes push prices beyond reasonable levels, to excessively high or low valuations that do not accurately reflect an asset or security’s true intrinsic value.

It means that speculation may lead to price fluctuations that, even though they are merely temporary, can have a long-term impact on the fortunes and stability of a company, an industry, or even a whole economy.

2. Economic bubble­s

A related disadvantage to unreasonable prices is that rampant speculation is often connected with economic bubbles, which form due to an unrealistically high rise in prices.

A speculative bubble results from demand by speculators initially driving prices higher, which then draws in more speculators, driving prices even higher.

How does Speculation work?

Speculation is the buying of an asset or financial instrument with the hope that the price of the asset or financial instrument will increase in the future. They also tend to be more active market traders – often seeking to profit from short-term price fluctuations – as opposed to being “buy and hold” investors.

Related Post: Best Books To Read – With Summary And Take-Aways

Conclusion: The difference between investment and speculation is – An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operation not meeting these requirements are speculative. So now we will quickly recap the things that we have learned above.

Investment, as well as speculation both, are equally important in our economy. Therefore further we cannot say that one is more important than the other.

An investment is an asset or item that is purchased with the objective that it will grow in value in the future. An investment can be any way that is used to generate a future source of income.

Speculation is the act of conducting a financial transaction that has a substantial risk of losing the principal value. But sometimes speculation also holds the expectation of a significant gain.

An individual can be both an investor as well as a speculator, he/she can divide his/her budget equally among investing and speculative activity.

Stock and equities and bonds are few types of investment. If invested carefully it will provide safety, growth, as well as a good amount of income.

Bullish and bearish are the two types of speculators. Speculation helps in the welfare of the economy and enhances market liquidity.

Brokerage commission and tax inefficiency are some of the demerits that you will face by doing investment in the stock market.

Speculators can push the price of the stock beyond reasonable levels and form economic bubbles.

Someone is sitting in the shade of a tree today because someone planted a tree a long time ago

Warren Buffett