Understanding the difference between investing and speculating is really important if you start investing your money. People invest for various reasons but you never know if your invested money will reach the return you expect and certainly not within a short time. Most invested money has long time goals and if you really want to reach a high return in a short time you start speculating.
Investing means you accept the market fluctuations and the return is the price investors want to pay for your investment instruments. When we discuss the difference between speculating and investing we are likely talking about stocks, bonds or mutual funds. Investing means we have long term goals and it is important to check the market situations when it is time to buy or to sell. Everyone wants to buy on the lowest price and to sell on the lowest price but you can only guess when it is the right moment. Speculating is different and you can compare it also with a kind of gamble. You expect higher return than the market pays and on a short time.
For example, you expect the oil prices will increase fast the next 6 months. If you buy now energy stocks with the intention to make a high profit within 6 months; you are speculating. There is no certainty that you are right and the result can be you have luck and you made a huge profit in a few months. That is speculating; normally if you invest in the energy sector you expect you will reach a high return in a time span between 5 and 10 years.
It is not always easy to understand the difference between investing and speculating. Both involve a risk. You are never sure you will reach a return, even if your time horizon is 10 years or more. There is always a risk that you invested in the wrong stocks, bonds or mutual funds. The future may look great for the investment instruments you’ve chosen but nobody can predict the future. Who has expected a few years ago that several banks should have financial problems and some of them are even bankrupt? Most everyone felt safe with the money they invested in their bank but we notice that many people lost a fortune with their bank shares and also with mutual funds who invest in the financial sector.
There are two important factors which may help you to understand the difference between speculating and investing:
*Time horizon: if you invest for less than two years in stocks, bonds or mutual funds; you are speculating
* Where you invest your money in? If you don’t know the answer of this question, you speculate with your money. Investing is an important decision in your life and you need to know which assets you’ve chosen. It is important you choose companies with a good perspective in the long run but you don’t need to expect these companies will make you rich in one or two years. In this case you are speculating.
Speculating can also be compared with some investment strategies, for example future or options contracts. In both contract you speculate that a price will go up or down and you can make huge profits but also great losses with these investment techniques.
There is nothing wrong with speculating as long you incorporate the risk and limit the amount of money which you use for speculating. It is maybe a good idea to set up two investment portfolios: one with safe money and one with money which you use for speculation. Both together will help you to make a chance to beat the market. Be sure you know the difference to avoid financial disaster.