Speculating vs Investing What’s the Difference

Do you recall the story of the Tortoise and the Hare? This is a flawless analogy of speculators and investors detailing their differing methods of winning the proverbial race to the finish line. These two competitors are the Yin and Yang, the night and day, or the men versus women of the financial world. They have entirely different goals (excluding making money) and typically attract specific personality types to each financial strategy based upon the daily rigors of their financial strategies.

The speculators are the so called “risk takers” willing to take large (but calculated) risks in search of large rewards over a short time period. In fact, the time can be so short that a speculator can make a buy and sell in less time than it will take for you to completely read this article. The speculator is the professional after “the fast money.” It does not imply that he is gambling, quite the contrary, which sets him apart from the investor. It means he is taking a calculated risk based upon years of training and expertise. For example, if the speculator can forecast a particular stock will make a sudden upward move in price based on his analysis, he will effectively have ruled out a substantial percentage of risk. Based upon his skill level, a good trader can achieve greater than a 75% success ratio of predicting a stocks price movements. Some of the best speculators work for so called “hedge funds” that scour the market in search of Company X predicting an increase in share price, as well as Company Y which is expected to decrease in share price. Then, the speculator will buy Company X and sell short Company Y in a trading scheme known as “hedging their positions.” These are often very risky, and reserved for wealthy clients who can sustain a greater than normal risk tolerance.

An investor on the other hand, has a fundamental “buy and hold” approach. Investors are not overly concerned with the day to day volatility of the actively traded securities that exchange hands (today its binary code through fiber optic lines) at a break neck pace. The investor is making a purchase for the hopes of increased future income in a less volatile market. These are generally large, well known corporations with a history of adequate company management and a steady increase of predictable growth or cash dividend payouts that provide a source of passive income. Similarly, the investor would buy real estate to access the capital appreciation of the property while simultaneously having the rental occupant pay the mortgage for him. Other investment choices would be treasury bonds, Certificates of Deposits (CDs), savings accounts, and any other financial vessel that provides a steady source of income or increases in value over an extended period of time.

Each strategy has its own positive and negative aspects, but as mentioned before, this is largely influenced by an individuals tolerance for stress, hard work, and a little bit of chaos. I myself am a speculator, specializing in short term trading in the hyper volatile penny stocks and it would be a terrible career choice for the risk intolerant individuals. That is, unless they had mass quantities of Pepto Bismol and Maalox stored away in their desk!

Personal Note: Questions/comments/concerns are always welcome.