Investing vs. Speculating

April 20, 2009

Some view investing in stocks, bonds and other investments as nothing more than gambling. Others see it as a smart strategy for making your money work for you. Who’s right? It depends on your approach.

These days it’s no secret that practically all investments carry some degree of risk. Stocks can lose value, or their issuers could stop paying dividends. Bonds may not be repaid as agreed. That’s why it’s so important to thoroughly research any investment you make.

But some investors prefer to buy and sell attractive stocks in the hope that they will increase in value. If this works, it can bring them a nice return in a short time frame. If it doesn’t, they could lose big. Trading in this manner is known as speculating.

Investing in its truest sense is putting money into something and leaving it there for the long term. By using this technique with stocks, investors can collect dividends. While one dividend payment may not amount to much, dividends are usually consistent over time. They are usually even paid when the company experiences a downturn. Over several years, an investor that sticks with a reliable dividend-paying stock will almost always come out ahead.

Another component of a sound long-term investment strategy is diversification. While speculators often invest all of their money in one market sector, savvy investors know that spreading their investments out is far less risky. The various investments balance each other out, so while some investments may lose money, the gains of others tend to make up for it.

Speculators, on the other hand, tend to invest heavily in one market or market sector that is showing an upward trend. While this sometimes works out well, one must sell at just the right time to make a profit. This means looking for signs that the market in question is at its peak, and that’s not always easy to do. Often speculators wait too long, and the market turns around before they have time to sell. This can result in substantial losses.

Despite all the risks, speculating is alive and well. Those who use such strategies are usually looking for a way to turn a quick buck, rather than investing wisely and reaping the rewards later. But as with any get rich quick scheme, speculating has a tendency to blow up in one’s face.

Investing is a complex game, and it requires a great deal of patience. You may not see returns right away, but if you do your homework and choose solid investments, you can make profit in the long run. Speculating is more like taking your money to the casino. You might get lucky at first, but if you continue, the odds are not in your favor.

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One Response to “Investing vs. Speculating”

  1. David says:

    The broad market average for investment returns is around 10 % ( not including inflation ) .. if you think you can beat this broad market return , then by definition you are speculating

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