Investment Vs Speculation

Investment

Investment refers to the acquisition of the asset, in the expectation of generating income. In a wider sense, it refers to the sacrifice of present money or other resources for the benefits that will arise in future. The two main element of investment is time and risk

Nowadays, there is a range of investment options available in the market as you can deposit money in the bank account, or you can acquire property, or purchase shares of the company, or invest your money in government bonds or contribute in the funds like EPF or PPF.

Investments are majorly divided into two categories i.e. fixed income investment and variable income investment. In fixed income investment there is a pre-specified rate of return like bonds, preference shares, provident fund and fixed deposits while in variable income investment, the return is not fixed like equity shares or property.

Speculation

Speculation is a trading activity that involves engaging in a risky financial transaction, in expectation of making enormous profits, from fluctuations in the market value of financial assets. In speculation, there is a high risk of losing maximum or all initial outlay, but it is offset by the probability of significant profit. Although, the risk is taken by speculators is properly analysed and calculated.

Speculation ca be seen in markets where the high fluctuations in the price of securities such as the market for stocks, bonds, derivatives, currency, commodity futures, etc.

An Investment is an asset acquired with the intent of generating income or appreciation in the future, whereas Speculation is a financial transaction that has a substantial risk of losing all value, but with the expectation of a significant gain.

Investors and traders take on calculated risk as they attempt to profit from transactions they make in the markets. The level of risk undertaken in the transactions is the main difference between investing and speculating.

Whenever a person spends money with the expectation that the endeavor will return a profit, they are investing. In this scenario, the undertaking bases the decision on a reasonable judgment made after a thorough investigation of the soundness that the endeavor has a good probability of success.

But what if the same person spends money on an undertaking that shows a high probability of failure? In this case, they are speculating. The success or failure depends primarily on chance, or on uncontrollable (external) forces or events.

The primary difference between investing and speculating is the amount of risk undertaken. High-risk speculation is typically akin to gambling, whereas lower-risk investing uses a basis of fundamentals and analysis.

As per Benjamin Graham, an American economist, and professional investor, investment is an activity, which upon complete analysis assures the safety of the amount invested and adequate return. Conversely, speculation is an activity which does not satisfy these requirements.

The basic distinguishing point amidst these two is that income in the investment is consistent, but in the case of speculation is inconsistent. So this article makes an attempt to clear the differences between investment and speculation.

Investment vs Speculation: They can be compared on the basis of 4 major criteria’s they are:

• Time Horizon
• Risk Levels
• Decision Criteria
• Investors Attitude

1. Time Horizon

Investment are generally held for a long term this may range from 2-5 years or more than that whereas speculation is held for a very short time span this is basically less than a year.

2. Risk Levels

The amount of risk is relatively moderate in investment when compared with speculation. Speculation generally involves greater risk than investing like options, futures, financial derivatives and similar financial instruments. Speculators ofter tent to be looking for a larger and quicker payout than long-term investors. Both involve risk but as the things move fast in speculations it is riskier than investing.

3. Decision Criteria

Investors tend to have a more basic fundamental approach whereas speculators, on the other hand, focus more on trends, market or investors psychology, they usually focus on these factors for a booking a quick profit.

4. Investors Attitude

Investors mostly have cautious and conservative considering their risk appetite, they know their capability and invest as per the risk that they can absorb, in case of speculator they are more aggressive with a high-risk appetite.

Differences

1. Investment refers to the purchase of an asset with the hope of getting returns. The term speculation denotes an act of conducting a risky financial transaction, in the hope of substantial profit.
2. In investment, the decisions are taken on the basis of fundamental analysis, i.e. performance of the company. On the other hand, in speculation decisions are based on hearsay, technical charts, and market psychology.
3. The quantity of risk is moderate in investment and high in case of speculation.
4. Investments are held for at least one year. Hence, it has a longer time horizon than speculation, where speculators hold assets for short term only.
5. The investors, expect profit from the change in the value of the asset. As opposed to speculators who expect profit from the change in the prices, due to demand and supply forces.
6. An investor expects the modest rate of return on the investment. On the contrary, a speculator expects higher profits from the speculation in exchange for the risk borne by him.
7. The investor uses his own funds for investment purposes. Conversely, speculator uses borrowed capital for speculation.
8. In speculation, the stability of income is absent it is uncertain and erratic which is not in the case of investment.
9. The psychological attitude of investors is conservative and cautious. In contrast, speculators are daring and careless.