Many newbie traders tend to confuse investing with speculating, thinking these acts are one and the same. It’s true that these two share a number of similarities, but they have differences that make them distinct from each other. Before we can tell one from another, though, it’s important to define what these activities mean.
What Is Investing?
Investing can mean plenty of things even for non-investors. Regular people, after all, tend to invest time, energy, and other resources in things and people that matter to them. In a strictly financial sense of the term, though, investing means buying financial products with the goal of using your new acquisition to generate income or appreciation in the future.
If you’re putting your money on bonds, stocks, real estate, or cryptocurrencies like Monero with the objective of getting a return from them later on, then you’re investing. In the future, the XMR coins in your Monero wallet may appreciate in value, enable you to earn periodic dividends, or even return your capital in full with interest. These possibilities serve as your reasons for investing in this cryptocurrency in the first place.
What Is Speculating?
Speculating, in many ways, is like investing, but the difference between these two activities is that speculating comes with a much higher risk compared to investing. A person who is speculating is aiming to get abnormally high returns by taking higher risk levels.
Let’s say you have your eyes on a biotechnology company that has equal chances of going bankrupt or becoming immensely important in the coming years. Now, the company is not making a lot of noise for itself, and the lack of understanding about the nature of the business and news about the company itself make it an unlikely choice for cautious investors.
Speculators, on the other hand, believe that the said biotech company will become a household name in the coming years and buy its stocks. Buying stocks in the business on a hunch for the sake of hitting gold, all despite the fact that it can go either way in the future, is speculating.
A Few More Key Differences
In addition to the level of risk involved, there are a few more differences between investing and speculating. Generally speaking, investments can take a much longer time to reach the financial objectives for which these were set aside. Many investors plan to keep their investments for years, waiting for the opportune moment to maximize their profits before they cash out. Because they’re in it for the long run and they want to minimize the risks they take on, they make every effort to research and analyze any potential assets before they add these to their portfolio.
On the other hand, many speculators are in it to make a profit within a shorter period of time, though they also wait for the best moment to make their move and take home a much larger gain. A good number of them also keep a close eye on the market so that they can maximize the opportunities presented by its ups and downs.
In terms of rewards, speculating takes the cake. Remember that greater rewards come with greater risks. Investing is much safer than speculating, so while there’s more of a chance that you’ll make a profit through investing, your earnings from it will be much smaller. Speculating, on the other hand, offers greater risks and greater rewards. The people who engage in it have to accept the fact that they’re shouldering a lot of risks for the chance that they’ll make it big. If you’re not surprised that you suffered through a loss, then you’re probably speculating.
The channels that one uses to invest and speculate may also be different, but there are many areas where these two can overlap. Investors often use brokerages where they can access securities. They rely on the firm’s expertise to manage their investments well and grow their money. Many investors also make use of their own research and analytical skills to determine the best investment options in the market today. Some even make use of Robo-advisers that utilize algorithms to offer advice that fits the investor’s goals and management style.
Meanwhile, speculators often engage in day trading and swing trading. Anyone can be a day trader, and some of the people who engage in this activity don’t rely on research and studies to make their financial decisions. They often hold on to their positions for a day, then close once the trading session is completed. Swing traders tend to do the same but for longer periods. They make an effort to determine when the prices will move in a span of a few weeks, then close their positions at the most opportune time. Investing and speculating carry different levels of risks and rewards, and people who want to grow their money may find themselves leaning towards one activity over the other. Make sure to do your research first so you can find the investment style that best suits you.