Investment and speculation are two financial jargons which are often used interchangeably. However, they are highly distinctive in nature in terms of the amount of risk involved. Investments are usually long-term and are sustainable in nature. On the other hand, speculation is short-term and requires quick observation of the decisions to be taken.
In the market parlance, both investment and speculation are used by the traders as per their requirements and time frame.
Generally, speculations create a sense of excitement amongst the traders. At times it may also be sentimental to speculate and win. However, there is no calculative approach and luck may not shine at all times in that case. Investment, on the other hand, is more of a study to invest. It is not a random approach and the trader thoroughly visits the financial reports of a company to invest in a stock.
Mentioned above, let us quickly go through the other important differences between investment and speculation:
- Investment, as mentioned above, is based on evaluating the financial performance of a company. The investor tends to go long and looks forward to future returns as well.
For example, a trader may invest in a stock which is worth Rs. 350/-, based on his analysis of the financials of the company, expecting that the price may go as high as Rs. 500/- in the span of 5 years and then he may sell.
Speculation is more of betting. Based on the market price of a stock, a trader decides his strike price. It is a high-risk situation and no one knows what will be the outcome. The experienced speculator’s use their past knowledge of the market prices of that stock, study the relevant charts and then buys or sells a particular stock.
- Investment is based on fundamental analysis and speculation is based on technical analysis. Hence, investment always waits for steady returns based on the value of the company. On the other hand, speculators simply follow the charts and look for quick unrealistic returns.
- The concept of demand and supply regulates the prices which greatly affects the decisions of the speculators. This brings great uncertainty to the speculator’s decision, as no one how will the price of a stock perform.
Investment decisions are not affected by the forces of demand and supply. Once the investor decides to buy a tock, it freezes the time frame and waits for the expected returns to arrive in that time frame.
Speculators become greedy at times expecting much higher returns, on the other hand, investors decide their profit margins and abide by that.
- When we talk about the financial statements of the company, investments are shown under the asset side of the balance sheet. They need to be carried forward every year by the company in their books of accounts and in case they decide to buy or sell the same, the returns are to be shown in the profit and loss account.
Speculations are not reflected in the balance sheet. Any gains or loss is reflected in the profit & loss account.
- Speculators basically give a shout out to buy when the stock price is high and sell when the market goes down and the prices are falling. They follow no strategy but expect that when prices are going high, they may go further high and when prices are falling, they may further fall.
Investors are the strategist and do not go by sentiments. They purchase the undervalued stocks and waits until the time their purchased stock reaches the expected value.
Hence, we learn from the above differences that though the terms investment and speculation twins, they are not the same. Investment works on a principal of adequate future returns and security, and speculation follows none. There is nothing wrong in becoming a speculator as such. It all depends upon the risk appetite and the time frame the trader or the investor is ready to pool in.