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?
- Types of Investments
- Examples of Investments
- See All 15 Items
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.
Stocks
Investing in shares of publicly traded companies allows individuals to benefit from potential price appreciation and dividend payouts over time through stock markets, leading to substantial returns.
Real Estate
Acquiring residential or commercial properties can produce rental income while also allowing for possible appreciation in value, making it a favored long-term investment avenue.
Bonds
Purchasing government or corporate bonds offers a stable income through periodic interest payments, with the initial investment returned upon maturity, providing a lower-risk alternative to stocks.
Mutual Funds
By investing in mutual funds, individuals can combine their funds with others to access a diversified portfolio of stocks, bonds, or other securities, professionally managed for optimal returns.
Cryptocurrencies
Investing in digital currencies such as Bitcoin or Ethereum presents the chance for high returns, though accompanied by greater volatility and risk compared to conventional investments.
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
Investing in digital assets like Bitcoin, Ethereum, or lesser-known altcoins can be extremely speculative due to their inherent volatility and the unpredictable nature of regulatory developments and technological advancements.
Startups and Private Companies
Investing in early-stage enterprises or startups via venture capital or crowdfunding offers the potential for significant returns but also entails a high risk of failure, categorizing it as a speculative investment.
Collectibles and Rare Items
Investing in unique collectibles such as vintage wines, stamps, comic books, or artworks can be speculative since their values often hinge on market trends and collector demand rather than on inherent value.
Real Estate Flipping
Acquiring properties for renovation and subsequent resale can be speculative, particularly in unstable real estate markets where property values can vary dramatically.
Options and Derivatives Trading
Participating in options trading or dealing with other derivative instruments can be particularly speculative, as these investments typically depend on short-term price movements and can lead to substantial losses if the market does not behave as anticipated.
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.
6. 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
Is speculating the same as investing?
No, speculating entails assuming greater risks with the aim of quickly profiting from market forecasts, while investing usually denotes a long-term approach centered on consistent growth and intrinsic value. Investments are often rooted in extensive research and analysis, whereas speculation frequently depends on market trends and precise timing.
What are the differences between investment and speculation?
Investment refers to the strategic allocation of resources, most commonly money, into an asset with the expectation of achieving consistent returns or profits over time, typically grounded in fundamental analysis. In contrast, speculation entails purchasing assets with the aim of profiting rapidly from short-term price changes, often leaning more on market trends and sentiment rather than the asset’s intrinsic value.
Can speculating or investing be considered a reliable source of income?
Both speculating and investing have the potential to generate income, yet they come with significant risks and do not guarantee consistent returns, rendering them unreliable for steady income for many individuals. It is essential for investors to approach these activities carefully and contemplate diversifying their portfolios to better manage potential losses.
About Savannah Munholland
Savannah Munholland is an investment writer passionate about helping people learn more about accessible alternative investments. She has more than three years of writing experience, focusing on alternative and traditional investing, technology, and education. Her expertise in writing about art and wine investments is grounded in an MFA with knowledge of and immersion in a wide range of art-related topics. She uses her skills in creative writing to bring an appealing level of interest to her journalistic work, shifting even the most basic financial and investment topics from humdrum to compelling. Her work has been published on Benzinga, FreightWaves, and Study.com.