As we known, investment and speculation are two popular ways for investors to make profits. However, some new investors are still confused about the concept of these two ways. Therefore, this article will help you understand both ways.
List of Contents
What Is An Investment?
An investment is an asset or item bought with the intention of earning income or increasing in value. An increase in the value of an asset over time is an appreciation. When a person buys a good as an investment, the intention is not to consume the good. However, the person is rather to use it to generate profits in the future. For instance, an investor may buy a monetary asset now with the expectation that it will provide income in the future.
What Is A Speculation?
Speculation can also be referred to as speculative trading. It is a financial term that refers to the act of buying an asset that has a high risk of losing value. The example of the assets are a commodity, goods, or real estate. However, it has the potential to increase in value in the future.
An investor who engages in speculative trading buys an asset in order to profit from minor market fluctuations. These are high-reward investments that are made for a short period of time. The investors always sell once they has made their desired profit. For example, a foreign currency investor may purchase some currency in the hope of selling it at a higher value when market fluctuations occur.
The Differences between Investment And Speculation
An investment is a purchase of a financial asset with the expectation of a highly stable return. On the other hand, speculation is a high-risk financial transaction with the expectation of large profits. Typically, in investment, traders always perform fundamental analyses to find potential businesses. In addition, they also use technical analysis to select buy and sell points. However, speculations and decisions are often based on rumors and market sentiment. Importantly, they rarely pay attention to short-term profits and make short-term transactions.
Investors tend to expect profits from changes in the value of the asset. Investors expect high returns, but it must be safe and low-risk. Therefore, investors are more willing to invest for a long time because most stocks in the short term move up and down according to market supply and demand. Investors often use their own money to invest.
Speculation, on the other hand, often makes trading decisions in very short periods of time such as speculating in the stock market. Speculators often borrow funds to invest. Moreover, the leverage of the transaction is always high. Moreover, the risk level of speculation is much higher than investment. Speculators always have high expectations because profits depend on price spreads that are affected by short-term market supply and demand. Therefore, income is often unstable.
Nevertheless, we should be aware of the advantages and disadvantages of speculation and investment before making an investment decision. Investors should keep the above in mind and invest wisely.
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Read more: Investing
Source: investopedia