The difference between investing and speculating

Do you know the difference between being an investor and a speculator? Most people think, that at the moment of buying a stock they are investors. But after selling in 3 months with a 25% loss they should know that they are not, they are simply bad speculators. In fact, we talk about two absolutely different styles, so different like the night and day, or the men versus women of the financial world. They also typically attract specific personality types to each financial strategy, so not everybody can become a perfect investor or a perfect speculator.

A speculator is somebody who practices financial speculation, which involves the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives, or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. Speculators are willing to take large, but calculated risks in search of large rewards over a short time period. Benjamin Graham once described speculation as “a rat race of trying to get the highest possible return in the shortest period of time.” Graham strongly believed investing should be in securities where the principal investment was reasonably safe and there were “satisfactory” returns.

An investor on the other hand is any party that makes an investment, which regularly purchase equity or debt securities for financial gain in exchange for funding an expanding company. They also purchase real estate, currency, commodity derivatives, personal property, or other assets, always in hopes of achieving capital gain, not as a profession or for short-term income. An investor has a fundamental “buy and hold” approach and is interested in long-term investments that provide a steady source of passive income. Typically the investor is the “boring” guy, because he is not concerned about the daily movements of the market.

So, why is knowing whether you are an investor or a speculator so important? It is simple, because knowing if you are an investor or a speculator is essential for developing an matching investment strategy for you. Know Thyself! It is not recommended to mix this two types of money making, unless you are very skilled and experienced. You should know your own risk tolerance and it should play an important role in your investment planning. Upon other terms, your risk tolerance is defined by your financial situation, investment knowledge/experience and of course your age. Financial risk also strongly depends on your personality, so again it is very important to know yourself before investing your money.