Speculation and investment are very similar to each other and carry a similar target of making profits. However, these two concepts differ from each other mainly by the level of risk tolerance. While a speculator takes a larger risk, he expects abnormal profits. An investor takes a moderate level of risk and expects satisfactory returns. The following article clearly explains the two concepts and provides a clear distinction between the two.
Investment
Investment in simple is referred to as monitory asset that is purchased with the hope that it would yield income in the future. Investments can be made in a number of forms depending on the investment return the investor requires and the risk that he is willing to take. Investments can be made through the purchase of an asset that is expected to appreciate in value in the future. Examples are the purchase of land, buildings, equipment and machinery.
Investors can also invest their funds in money markets using investment instruments such as bills, bonds, etc. The investment made by an individual depends on their risk appetite and the return that they expect. An investor with a lower risk tolerance may chose to invest in safe securities such as treasury bills and bonds which are very safe but have very low interest. Investors with a high risk tolerance may make risky investments in stock markets that yield higher rates of return.
Speculation
Speculation is the taking of higher risk and standing the possibility of losing all money invested. Speculation is similar to gambling and entails a very high risk that an investor may loose all his money or make very substantial returns if his speculation turns out to be correct. However, it must be noted that speculation is not exactly the same as gambling, because a speculator will take a calculated risk whereas gambling is more of a decision made on chance.
The motivation for an investor to speculate is the possibility of making substantial returns, even though they maybe at the risk of losing all. The following is an example for speculation. An investor decides to invest his funds in the stock market and notices the stock of company ABC is overpriced. In a speculative move, the investor will short sell the stock (short selling is where you borrow stock, sell it at a higher price and buy it back when the prices falls). Once the price falls the stock will be purchased at the lower price and effectively ‘returned’ to its holder. This move is an example of speculation that entails very high risk because if the stock actually increased in price the investor would have made a substantial loss.
Speculation and Investment
Speculation and investment are often times confused by many to be the same thing, even though they are quite different to each other in terms of the asset that is being invested in, the amount of risk taken, investment holding period and the expectations of the investor. The main similarity between investing and speculating is that, in both instances, the investor strives to make a profit and improve his financial returns.
The major difference between the two is the level of risk that is taken on. An investor tries to make satisfactory returns from funds invested by taking lower and moderate levels of risk. A speculator, on the other hand, takes a much larger amount of risk and makes investments that may yield abnormally large profits or equally large losses.
Summary:
Speculation vs Investment
- Speculation and investment are often times confused by many to be the same thing, even though they are quite different to each other in terms of the asset that is being invested in, the amount of risk taken, investment holding period and the expectations of the investor.
- Investment in simple is referred to as monitory asset that is purchased with the hope that it would yield income in the future.
- Speculation is the taking of higher risk and standing the possibility of losing all money invested. Speculation is similar to gambling and entails a very high risk that an investor may lose all his money or make very substantial returns if his speculation turns out to be correct.