Investments and Speculations are two very different concepts.
Investment and speculation both involve the purchase of assets such as shares and securities, with an expectation of return. However, an investment can be distinguished from speculation by risk-bearing capacity, return expectations, and duration of the trade.
The capacity to bear risk distinguishes an investor from a speculator. An investor prefers low-risk investments, whereas a speculator is prepared to take higher risks for higher returns. Speculation focuses more on returns than safety, thereby encouraging frequent trading without any intention of owning the investment.
The speculator’s motive is to achieve profits through price change, that is, capital gains are more important than the direct income from an investment. Thus, speculation is associated with buying low and selling high with the hope of making large capital gains. Investors are careful while selecting securities for trading. Investments, in most instances, expect an income in addition to the capital gains that may accrue when the securities are traded in the market.
Investment is long term in nature. An investor commits funds for a longer period in the expectation of holding period gains. However, speculator trades frequently; hence, the holding period of securities is very short.
The identification of these distinctions helps to define the role of the investor and the speculator in the market. The investor can be said to be interested in a good rate of return on a consistent basis over a relatively longer duration. For this purpose, the investor computes the real worth of the security before investing in it. The speculator seeks very large returns from the market quickly. For a speculator, market expectations and price movements are the main factors influencing a buy or sell decision. Speculation, thus, is riskier than investment.
In any stock exchange, there are two main categories of speculators called the bulls and bears. A bull buys shares in the expectation of selling them at a higher price. When there is a bullish tendency in the market, share prices tend to go up since the demand for the shares is high. A bear sells shares in the expectation of a fall in price with the intention of buying the shares at a lower price at a future date. These bearish tendencies result in a fall in the price of shares.
A share market needs both investment and speculative activities. Speculative activity adds to market liquidity. A wider distribution of shareholders makes it necessary for a market to exist.
Major differences between investment and speculation are summarized below:
Investment: It is a purchase of assets with the expectation of regular return.
Speculation: it is a financial transaction with an expectation of capital gain or substantial profit.
Investment: It is a long term planning (at least one year or more).
Speculation: It is a short term plan (only for a few months/days/hours).
3. Risk Disposition
Investment: It involves only modest risk.
Speculation: It involves a higher level of risk.
4. Expected Rate Of Return
Investment: It expects a modest rate of return because of moderate risk.
Speculation: Due to the higher level of risk involved, it expects a higher rate of return.
Investment: Investor’s own funds and the property is used.
Speculation: Generally borrowings from others are used.
6. Income Type
Investment: Income is certain and stable in investment.
Speculation: Income is uncertain and unstable in speculation.
Investment: Investor possesses caring and cautious behaviour.
Speculation: Speculator possess careless and daring behaviour.