Investment Vs Speculation

Investment and speculation are two terms which are closely related. Both involve purchase of assets like shares and securities. Traditionally, investment is distinguished from speculation with respect to three factors, viz. (1) risk, (2) capital gain and (3) time period.

Risk

It refers to the possibility of incurring a loss in a financial transaction. It arises from the possibility of variation in returns from an investment. Risk is invariably related to return. Higher return is associated with higher risk.

No investment is completely risk free. An investor generally commits his funds to low risk investment, whereas a speculator commits his funds to higher risk investments. A speculator is prepared to take higher risks in order to achieve higher returns.

Capital Gain

Thpeculator’otivo acvrofits througrharg.es interested in capital gains rather than the income from the investment. If purchase of securities is preceded by proper investigation and analysis to receive a stable return and capital appreciation over a period of time, it is investment.

Thus, speculation is associated with buying low and selling high with the hope of making large capital gains. A speculator consequently engages in frequent buying and selling transactions.

Time Period

Investment is long-term in nature, whereas speculation is short-term. An investor commits his funds for a longer period and waits for his return. But a speculator is interested in short-term trade gains through buying and selling of investment instruments.

Analysis of these distinctions helps us to identify the role of an investor and a speculator. An investor is interested in a good rate of return earned on a rather consistent basis for a relatively longer period of time. He evaluates the worth of a security before investing in it. A speculator seeks opportunities promising very large returns earned rather quickly. He is interested in market action and price movements. Consequently, speculation is more risky than investment.

Basically, both investment and speculation aim at good returns. The difference is in motives and methods. As a result, the distinction between investment and speculation is not very wide. Investment is sometimes described as a well grounded and carefully planned speculation.