Speculating vs. Investing: What’s the Difference?

Purchasing assets like stocks, bonds and shares of funds can be a great way to reach your financial goals. Investing is generally considered a long-term strategy. In your research, you may have also heard the term speculating. While investing and speculating may seem similar, they differ in strategy, investment horizon and risk. Comparing speculating vs. investing can help you create your strategy.

What is Investing?

Investing is the process of buying assets such as stocks, bonds and real estate in hopes they grow in value. In exchange for this growth, the investor takes on a certain level of risk that varies with each investment. Before purchasing an asset, investors should conduct research into the asset to verify its growth potential based on volume, past performance and quality of the company. Typically, investments are held for months or years to achieve long-term growth. The belief is that the stock market rises over time and so will the investments despite short-term fluctuations.

Types of Investments

Investors can add many types of assets to their portfolios. These assets typically fall into two categories:

• Traditional investments: Traditional investments are assets that are traded on the traditional stock market. These assets include company stock, mutual funds, exchange-traded funds (ETFs) and bonds.
• Alternative investments: Unlike traditional investments, alternative investments are not traded on public markets, often making them more difficult to buy and sell. Typically, alternatives are traded on specialized trading platforms. Alternatives include cryptocurrency, real estate, private equity and collectibles like fine art and precious metals.

Examples of Investments

A strong portfolio is diversified, often with a balance of traditional and alternative investments. Here are a few examples of common investments you could purchase. 

• High-quality stocks: These are shares of companies with high profitability and strong balance sheets. They consistently make good profits and their stocks have a history of overall growth. High-quality stocks are sold on traditional markets and can be easily bought and sold.
• Bonds: Bonds essentially work as loans. Businesses or the government sell bonds to raise money for a fixed investment period. Investors will earn a fixed return on investment outlined in the initial contract. 
• Real estate: Investors can hold properties inside their portfolio, earning profits from rent from tenants or the property’s appreciation over time. Investors can purchase entire pieces of real estate, purchase a property with an investment group or purchase a share of a real estate investment trust (REIT). 
• Certificate of deposit: A certificate of deposit (CD) is similar to a savings account, though it’s less liquid and has a higher interest rate. Investors choose a CD for a fixed amount of time, during which they earn interest rates on the sum within the CD. While holding the CD, investors cannot withdraw money from the fund without penalty. 
• Annuities: Annuities are insurance contracts where the annuitant pays a monthly premium or lump sum to the insurer. In exchange, the insurer pays back the investment amount plus interest in the future for a fixed amount of time or the remainder of the annuitant’s life. 

What is Speculating?

Speculating, like investing, involves the buying and selling of assets in hopes to reach financial success. However, unlike investing, speculators are hoping to make a quick profit. To do so, they often purchase riskier investments that could either rise quickly in value or crash completely. 

Types of Speculative Trading

Speculating is a short-term strategy, where speculators hope to turn a profit in a matter of hours or days. Check out these two types of speculative trading:

• Day trading: When day trading, the trader is aiming to buy and sell all products within the same day, meaning they are holding no investments when the market closes. Day traders try to buy low and sell high to end the day with more money than they began with. However, there is no guarantee of how a stock will move, so this is a risky strategy and requires constant monitoring of the markets.
• Swing trading: Swing trading is similar to day trading, except the trader may hold assets for a few days or weeks. It is still a short-term strategy where the trader is hoping to buy low and sell high.

Examples of Speculative Investments

Many assets could be speculative, but speculative traders often prefer alternatives to traditional assets. Here are a few examples of common speculative investments:

• Cryptocurrencies: Cryptocurrency took the investing world by storm after the release and rise of Bitcoin. Now there are hundreds of digital currencies traders can invest in. Cryptocurrencies rise and fall in value very quickly, making them a popular investment for speculative traders.
• Commodities: Commodities include raw materials such as oil, gold, silver and agricultural goods. These investments are very volatile, meaning they fluctuate quickly. For this reason, traders hope to buy when they are low in value and sell when they rise.
• Options: When purchasing an option, traders buy a contract that states they can either buy or sell the underlying asset in the future for a predetermined price. For example, if a trader thinks an asset will rise in value, they can purchase an option to buy that asset in the future. Then, in the future, the option may let them purchase that asset for a lower price than market value. 
• Artwork: Many people buy high-quality artwork from renowned artists to quickly sell for a profit. Collectors will seek to buy artwork for a low price to resell for a profit. These traders buy and sell art from auction houses, galleries and private sales. Traders may also purchase non-fungible tokens (NFTs), a form of digital artwork. 
• Collectibles: Speculative traders may purchase collectibles like sports cards, wines, coins, toys and other popular, high-value items to try and resell them for a higher price. Traders could try to collect a set before reselling or identify items being sold for low to flip them.

6 Major Differences Between Investing vs Speculating

Speculating vs. investing may both involve the buying and selling of assets but the similarities end there. Here are six ways they differ.

1. Time Horizon

Investing is a long-term strategy where investors purchase assets they expect to grow over time. Typically, investors will hold assets for months or even years. Speculative traders have a short time horizon. They’re trying to buy and sell items within a matter of hours or days to turn a quick profit.

2. Risk Level

Investing is generally considered low risk, since the stock market generally trends upward over time, despite short-term rises and falls. Every asset has a different level of associated risk, but holding investments for a long time can lead to financial success. Speculating is risky since it’s impossible to determine how a stock will move in the short term precisely. Traders hope for a big return but take on a high level of risk in return.

3. Deployment of Funds

Investors use their funds and savings to build a portfolio to grow their wealth. Speculators may use their funds, but they also may borrow funds to attempt to make a profit that will benefit the speculator and the owner of the funds.

4. Investor Attitude

Investors are systemic with their approach, making cautious and informed decisions about their investments. They seek high-quality assets that have a strong potential of growing over time. On the other hand, speculators are aggressive in their attitude and strategy. They are making quick decisions while prioritizing short-term gains over quality.

5. Decision Criteria

Speculators and investors determine their investments based on different factors. Investors are looking for high-quality investments with a strong growth potential determined by market fundamentals, professional opinions and other objective factors. Speculators aren’t necessarily looking for quality investments. They are looking for assets that they think will spike in value quickly. They determine these investments based on technical charts, market psychology and their own opinion and feelings toward the market.

5. Expected Returns

Typically, investors understand that they aren’t going to get huge returns. The returns will usually be modest but steady with a somewhat clear growth trajectory. Speculators, when lucky, may see large, sudden returns. However, their strategy is extremely risky, and they are often more likely to lose money than gain it. 

Achieve Your Financial Goals

Speculators and investors have the same overall goal — to grow their wealth and achieve their financial goals. However, speculative investing is much more risky than traditional investing. However you choose to pursue gains, ensure you are prepared for the level of risk you take on and make informed decisions.

Frequently Asked Questions