The difference between an investor and a speculator

An investor is someone who commits capital into an asset in order to earn a return. When it comes to financial markets, you invest in assets when you expect to get a return on your investment with long-term growth, and you also expect to recoup your initial investment. This does not mean that the investments are risk free, but the expectation is that the risks are low. Most investments create cash flows such as interest, coupons, lease payments, or dividends. However, in some cases, the profits are reinvested to add value to the asset.

When you invest, you are not actually investing in the asset itself, but in the company or project. This is because you first thoroughly analyze the company and believe it has long-term growth potential or undervalued assets. As an investor, you carefully analyze the balance sheet and come to the conclusion that the possibility of a significant loss is unlikely.

When you buy a stock as an investor, you are planning to hold on to your holding for a long time and this is the most important difference between an investor and a speculator.

If the price goes down, you know why and you can determine whether this is a short-term situation or a change that will have a long-term impact on the share price. Then you can act accordingly.

A speculator is a person who buys an asset in the hope of selling it and achieving a return in a short time period that may not exceed one year. Speculation usually relies on forming a theory about what will happen in the very near future. However, there is no certainty, and the risk is much higher. During the gold rush, people looking for gold were known as speculators. They had no way of knowing if they would find the gold, but they were willing to take the risk because  the reward would be much greater.

Speculation dominated in the early days of Wall Street when most listed companies did not have a proven track record. But today, there are hundreds of companies with long track records. Investment analysis has come a long way as well, as investors can now buy certain stocks with more certainty.

When you are a speculator, you never invest in the company but you bet on the asset itself and how its prices will move in the near future, you just hope to make a quick and easy profit. You buy because you feel a price movement for some reason (through technical analysis and market news, for example).

Since you are only interested in profiting from the price movement, it is more likely that you will sell and move to another stock perhaps on the same day or hour. You may hold the stock for a short or long period depending on the price movements and your business plan. If you were a speculator, you would have no real interest in the company that issued the shares other than being in the right place at the right time.

The main difference between an investor and a speculator is the way they try to generate returns. Although the goal of both the investor and the speculator is the same, each of them has a completely different approach from the other. While the investor cares more about the company, its fundamentals, and its growth opportunities in the long term in order to achieve a return from growth, the speculator cares about the asset itself and the possibilities of making price movements in his favor so that he can make a quick and easy profit.

Here is a summary of the most important differences between an investor and a speculator:

• The investment period differs from the speculation period
• An investment strategy differs from a speculative strategy
• The amount of targeted returns varies between investment and speculation
• The method of analyzing speculation differs from that of investment
• Differences between investing and speculation

Here are some of the investment and speculation rules that you must take into consideration before proceeding with any of them:

To prevent yourself from suddenly turning from a speculator into an investor and potentially losing a lot of returns, it’s important to have a plan.

Apart from that there are a lot of things that speculators have to do and know, there are five basic things that speculators need to do:

Determine the exit point of the loss.

Determine the exit point for profit.

Deciding whether to set a speculative time limit (when the sale occurs regardless of the size of the profit or loss).

Adhere to these rules.

Keep a journal to analyze how well the speculative rules are working.

The exit points of the speculation do not have to be a fixed price of the stock. They can break out of moving averages or other technical parameters.

Time limits can be useful if their initial reason for entering is that something is going to happen soon, and this includes earnings, merger, organizational change, etc. When the entry reason is wrong, exit. This also applies to short-term market movements in the trading day. If it doesn’t work out in the expected timeframe, get out.

Discipline is also important because it forces the speculator to be careful and get out if something goes wrong.

• investment rules

It is not much different when it comes to investors. As an investor, you must do the following in order to protect yourself from losses:

Identify events that will change your opinion of the company.

Setting a price that makes selling irresistible due to overvaluation.

Do an analysis of when to add or reduce positions from the portfolio.

• Adhere to these rules.

Keep a journal to analyze the success of your investment rules.

As long as the share price is rising and moving positively, both the speculator and the investor will be satisfied.

However, when the share price starts to fall, that’s another matter. A smart trader always has an escape plan to prevent small losses from becoming big losses. If you speculate, you won’t have any emotional attachment to the stock, so it’s easy to dump the loser at a predetermined point.

Sometimes, you may start out as a speculator, decide that you like a stock despite its poor performance, and decide to hold onto it instead of cutting your losses. Here, the speculator becomes an investor.

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