One could say that the difference between investing and speculating is simply a matter of risk tolerance, with speculation being closer to gambling. However, the truth is that there is no clear line between them as all investments involve risk. Still, there are differences you should be aware of regardless of your financial goals.
Investing is usually a long-term game
Definitions vary, but investing is most often viewed as an attempt to profit from transactions, stocks, or assets. Often there is a “safety first” approach, as the most conservative investors trade potentially higher returns for lower risk of loss principle. Safe investments can include bonds, buying real estate, loans to low risk borrowers, or investing in Blue chip stocks.
To ensure the highest margin of safety, investors evaluate various assets, industries and market trends and try to select an investment that best offers their chance for constant returns. The most conservative investor will avoid short-term market volatility by investing long-term in assets or stocks that are often traded over many decades, known as “passive” investing.
This strategy has worked well (think Warren Buffett), especially when investing in the stock market like it had a historical return of around 11% per year, on average. The “average” portion is important because the longer the money is invested, the more it becomes connectionmaking it less prone to short-term, double-digit market drops.
Speculations tend to be geared towards short-term gains
The old adage “big risk comes big reward” applies to speculation, where money is put into investments that are more likely to fail and sometimes pay off with a big reward. Speculators (including Momentum trader) tend to trade more often, and they will bet on higher risk markets like commodities, cryptocurrencies, or stocks of small or distressed companies.
G / O Media can receive a commission
Just because speculation is more risky doesn’t mean it’s all just gambling. The same level of scrutiny and research that is applied in looking for long term investment opportunities can be applied to short term cycles and market behavior (you can argue that the Gamestop’s Short Squeeze was rational investing, for example). However, if you have people making these trades based on zero knowledge of what they are investing in (such as Crypto, often), well, basically it’s gambling.
Risk is a spectrum that encompasses both investment and speculation
Knowing whether you are investing or speculating is not about what you are buying, but why you are buying – and that varies depending on your financial goals. For example, a low-income earner close to retirement is likely to not want to cash out his 401 (k) nest egg in order to pursue a short-term rally in AMC stock. In contrast, someone with more wealth might want theirs Exposure only stocks or bonds, so they’re happy to invest a small portion of that wealth in high-risk intangibles like crypto.
While it is important to know the difference between low risk and high risk investments, it is more important to know your own risk tolerance (more on this Here). And since so much depends on your age, financial situation, and retirement goals, think about it Consultation with a financial advisor to guide you through the tradeoffs that come with investing and speculating.
