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Differentiate between investment and speculation
Investment is nothing but investors hold the asset or security for a long period of time whereas speculation is for profit making and used usually for a shorter period of time.
In other words investments assure amount safety and good returns whereas speculation is opposite to investment that means amount safety and return is not assured. Amount in investment is consistent and the amount in speculation is inconsistent.
Investment
Investment involves purchase of assets or security hoping it will generate income or expected to appreciate in future. Financial investments include purchasing of bonds or stocks, mutual funds etc. the word investment is not only limited to the finance world; it can be used in personal lives as well.
Investments make sure earned money is productive and it being productive is the important aspect in the financial aspect. Investments are divided into fixed income where rate of return is pre specified (bonds, preference shares) and variable income where rate of return is not pre specified (equity shares etc.)
Some of the traditional investments are gold and jewellery, provident funds, fixed deposits etc. and some of the alternative investments are antique collectibles, structured products, private equity investments etc.
Speculation
Investors used their money in speculation in order to earn more profits from price changes in the market. Life of speculation is short term. Speculation involves more uncertainty and higher risk.
Investing in speculation is art, not all people do it because it needs deep market knowledge and proper training. Depending on sector risk and uncertainty of market changes differs.
Differences
The major differences between investment and speculation are as follows −
| Sr.No | Investment | Speculation |
|---|---|---|
| 1 | Buying an asset with the hope of getting returns. | Risky financial transaction with the hope to earn decent profits. |
| 2 | Decisions will be made based on the company performance. | Decisions are made on market psychology, technical charts etc. |
| 3 | Long term time horizon. | Short term time horizon. |
| 4 | Risk is moderate. | High risk is involved. |
| 5 | Value change. | Intent to Price changes. |
| 6 | Expected rate of return is modest. . | Expected rate of return is high. |
| 7 | Uses investors’ own funds. | Uses borrowed funds. |
| 8 | Stable income. | Income is uncertain/erratic. |
| 9 | Behavior is cautious and conservative. | Behaviour is careless/daring. |
Conclusion
One should be aware of pros and cons of speculation and investment before taking their decision of investing. One should invest neither only in investment nor in speculation. Before arriving at when to invest and where to invest, investors should keep the above mentioned things in mind and invest wisely.
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