The terms "speculating" and "investment" are often used interchangeably, but they are very different approaches to purchasing investment products. Speculating is more of a psychological trading method, where a buyer of stocks or other products makes his purchases based on feelings or sentiments of the market. Investing typically means the buyer uses quantitative and factual data to make decisions.
Speculators are sometimes referred to as "glorified gamblers," because their investment decisions are based more on hunches and feelings. They often look at market trends and try to buy stocks as they move up. Investment decisions are based more on the study of company financial reports, analyst opinions, statements of future direction and the competence of company leadership. Investors, on the other hand, consider factors like the ratio of earnings to share price, cash flow, and long-term debt to analyze decisions.
Speculating is typically a short-term effort to grab quick profits, while investments are intended to profit over a longer period of time. Speculators look to trade on market momentum and play off the short-term psychological patterns that cause people to buy or sell collectively. Investors take a more businesslike approach to investing, trying to buy into stocks that are beaten down or available at a discounted price. By analyzing financial data and other company traits, the long-term investor projects strong future growth for the company and stock.
Income vs. Profit
Speculating is regarded as a pursuit of profits, while investing is more often considered a pursuit of income over time. This makes the pursuit of dividend or interest income a key variable in determining whether someone is speculating or investing. A speculator buys a stock with a primary hope that the share price increases quickly so he can sell and profit the difference. An investor buys a stock looking to earn dividend income and eventually see growth in share prices. He would also buy bonds and interest-bearing products for longer-term income.
Risk vs. Return
Comparing the risks of an investment to potential returns is an element of both speculation and investing. Speculators spend less time analyzing risks and tend to emphasize opportunities for quick profits. Author and financial analyst Benjamin Graham points out that investments require careful consideration of safety and satisfactory returns. In other words, most investors buy products that balance minimal risks with reasonable returns.
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