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Investment Vs. Speculation: Some Key Differences

Many people often perceive trading and investment as a gamble or lottery u2013 you may get lucky or run into losses. And it is this perception that tends to keep away many individuals from engaging in investment and trading.

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Investment Vs. Speculation: Some Key Differences

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  1. Investment Vs. Speculation: Some Key Differences

  2. Introduction • Many people often perceive trading and investment as a gamble or lottery – you may get lucky or run into losses. And it is this perception that tends to keep away many individuals from engaging in investment and trading. Well, it is true that any venture can become rather risky if adequate measures are not taken to avoid them. And that is perhaps what differentiates planned investments from mere speculations. Here’s an in-depth look at some of the differences between the two concepts:

  3. Investment • An investment involves well-defined and specific objectives classified as short-, mid- and long-term goals. An investor carefully considers these goals and his/her risk tolerance levels to formulate an investment plan and earmark the right securities to invest in. • While investments also involve their risks, an investor carries out a thorough equity fundamental analysis and weighs the pros and cons of investing in a security. S/he also considers the current market situation and predictions and uses metrics like the P/E ratio to gauge the strength of a stock or security. • They also carry out a study of the company or institution offering the investment assets and analyse factors like its credibility, the industry it belongs to, its transparency and objectives etc.

  4. Speculation • In contrast to investments, speculations are higher risk ventures where individuals trade stocks and other securities despite the high probability of failure. • Here, the aim is not to hold on to the asset but to slide in and out of positions with the aim of making huge profits in very less time. • Speculations are considered to be very volatile as compared to investments as these do not involve a well-structured and planned out strategy. Moreover, unlike investments in stocks and debt schemes where one decides investment objectives and drafts concrete plans, speculations are usually the result of a rather quick (albeit largely informed) decision.

  5. While speculations involve considerably higher risks compared to investments, they cannot be totally deemed as equivalent to gambling. This is because although speculations can be on the spur of the moment, they are not exactly impulsive and involve some amount of quick consideration. • Having said that, due to the transient nature of speculations, one does not have the time to carry out thorough analyses of the assets being traded. Typically, speculators hold their assets for very short spells of time when they believe the trade market to be in their favour.

  6. Conclusion • Investing and speculating are both extremely different strategies with their own sets of pros and cons. Differentiating between the two helps individuals understand their requirements more accurately and evaluate which of the two strategies they should opt for. A thorough analysis of the two techniques and timely guidance from stock brokers and advisors can go a long way. Click here to know more about us!

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