Investing vs Speculating: Choose Your Financial Strategy

Investing: Meaning and Pros/Cons

Investing means purchasing and holding an asset for the long term (at least one year) with the goal of generating income in case the asset increases value over time. The most common examples of long-term investments are stocks, bonds and saving accounts. Investors get income in the form of dividends, interest payments or the full return of the spent capital.

The process of choosing the right asset to invest in is complicated. Investors base their decisions on in-depth analysis and research. To evaluate an investment, they need to analyse sectors, trends and patterns of the chosen market. 

To evaluate an investment, investors need to deeply analyse sectors, trends and patterns of the chosen market.

Investors use fundamental and technical analysis for this purpose. With the fundamental analysis, they gauge microeconomic and macroeconomic factors. Technical analysis helps provide an overview of trends related to the price and volume in the market.

It seems investing is the perfect financial strategy. Nevertheless, it also has pitfalls.

Best Instruments to Invest 

Here's the list of the perfect instruments you can invest in, even if you're a beginner. 

• Saving accounts. It's unlikely you ever lose your money when applying for saving accounts. When investing in saving accounts, you know the interest you'll get. Saving accounts are usually protected by governments. 
• Government bonds. Government debt of developed countries is one of the safest investments as governments can print money to repay. 
• Blue-chip stocks. Such stocks can carry small risks. They are considered more stable and less reactive to overall market moves. Blue-chip companies have a national reputation for quality and reliability and can operate profitably in unprofitable times. Usually, such stocks don't lose their value within five to ten years.

What Is Speculative Trading?

Speculating is a strategy of buying securities with a high risk of failure. Speculators are eager to get an enormous return from an asset, the direction of which is barely predictable. The internal speculative risk associated with a transaction is typically well above average. 

Although speculating may seem frivolous, this isn't the case. Every speculation activity requires thoughtful analysis. The main idea of speculating is to bear a high risk for a higher return.

Let's look at an example. There's a small fintech company, and it seems to be getting successful due to the industry's popularity. Nevertheless, the company is rather new, and there's intense competition. There's not a lot of information about the company. What would an investor do? 

It's more likely they won't put money into an unknown company. As for speculators, they'll catch this chance as there's a 50% probability the company will skyrocket. If it does, the speculator will earn a lot. If the company fails, the speculator will lose money. 

The speculation is a controversial strategy. Let's consider its advantages and limitations. 

Best Instruments to Speculate On

Although there are plenty of instruments that can be used to speculate, we gather the most exceptional ones. 

• Derivatives include options, futures contracts and CFDs, and trading of an asset on margin. The usage of leverage is always speculative.
• Short Selling. When shorting stocks, there's no certainty the price won't go up, but it can be a part of a hedging strategy, 
• ETFs. Pay attention to ETFs that invest in new industries, for example, cryptocurrency, blockchain orcannabis stocks. ETFs allow you to get exposure to several assets, which are all damaged by a professional. Another benefit is that you won't pay capital gains taxes unless the assets are eventually sold for a profit. 

Speculative Trading

A perfect example of speculating is Forex trading. Despite comprehensive technical and fundamental analysis, it's not that easy to predict market moves. Forex traders meet with unexpected news factors, rumours and huge volatility.There are two types of speculative trades:

• Day traders. Such traders can be considered speculative because they open several trades within the day. Usually, they hold positions within one trading day and close all of them when the trading session ends. 

• Swing traders. Although swing traders may hold a position for several weeks, they suffer increased risks caused by the high volatility and uncertainties about the upcoming movement. 

Difference Between Investment and Speculation

To make the comparison easier, take a look at the table below. 

Let's clarify the points. The main difference between investing and speculating is the level of risk and the possibility of getting the capital back. Both types experience the risk of losing money. 

The main difference between investing and speculating is the level of risk and the possibility of getting the capital back.

Investors may lose money if something unexpected happens in the market — for example, a pandemic or financial crisis. 

In terms of time, investors put up their money for an extended period, at least one year. Speculators can't bear the high risks for a long time. That's why they invest for less than one year. Moreover, any investor aims to save money for the future and avoid the depreciation of their money. Speculators look for fast gains.

The investor's attitude is cautious and conservative as long-term investments require in-depth analysis. They're keen on continuous profit, not fast income. Speculators act fast and persistently to get high profits and not miss a chance to earn.

Although both types use fundamental and technical analysis, investors use the fundamental one more than technical. They base their decisions on an in-depth consideration of microeconomic and macroeconomic factors. As for the speculators, to get a potentially profit, they need to enter the market perfectly. Thus, speculators consider technical levels and also rely on market sentiment. Rumours and news are the leading and most critical factors of short-term investments. 

Investment vs Speculation: What to Choose?

If you still can't decide whether you're an investor or a speculator, think about the risk you can bear. Speculators earn more. However, the risk of losing money is much higher. A more significant profit today may become a huge loss tomorrow. 

A more significant profit today may become a huge loss tomorrow.

If you don't like to take risks, it's better to think about investments. The possible gains are lower since you don't put your funds through such risk. However, it's an opportunity to have something for the future. 

It's pretty much clear what each type means, but there are situations where it's uncertain about what you are exactly.

Do you remember our example of a fintech company? You likely thought we were wrong because buying a company's stocks is usually considered to be investing, not speculating. However, small-cap stocks are speculative. But if we take the same company and assume it releases full economic data, you can predict the expected earnings and the company's advantages. So, you're not a speculator anymore; you're an investor. 

Another example is a hedge fund. This instrument can be used to hedge risks against a market crash or high volatility and to speculate. Real estate is basically an investment that will bring profit in the future. 

However, it becomes speculation if it's profitable if its resale value rises. Venture capital funds mostly invest in speculative startups. Nevertheless, if the fund diversifies by investing in plenty of startups, it can be considered hedging related to investing.

How to Speculate Professionally

Many people use the speculation strategy as the higher profit is an excellent reason to risk. However, not everyone knows how to speculate professionally to boost profits significantly. 

• Speculation is hard work. If you think speculation is just fun, you'll lose your money. Speculation requires more knowledge and concentration than investing. Profitable speculation is based on fundamental and technical analysis. No matter what market you speculate in, you need to know how to analyse micro- and macroeconomics factors, market moves and historical data. Libertex offers educational materials you can use to increase your trading level. 
• Be in the market. If you haven't chosen the market you want to speculate on and have no interest in learning about it, you'll fail. Every speculator knows that news and rumours drive markets in short- and middle-terms the most. We provide you with a great variety of CFD instruments. Choose forex, metals, cryptocurrencies, indices, stocks, oil and gas or agricultural products.
• Trading strategy. Every great speculator has an approach. If we talk about forex, you should know what indicators and patterns provide perfect entry, Stop-Loss and Take-Profit levels. To create your own trading strategy, Libertex offers a free demo account that has a wide range of useful trading indicators, real quotes and market conditions.

• Be ready for expenses. Each financial activity costs you something. Many speculators apply to brokers as they offer leverage. Leverage is the amount of money a broker can give you to open a trade. The higher the leverage is, the less money you need to enter the market. But note the higher the leverage, higher the risk. Libertex offers an extensive range of leverage up to 1:30 for retail clients. 

Conclusion 

Let's sum up. Although investing and speculating are different financial strategies, they have many things in common. It's up to you to decide whether you're a risky speculator or a conservative investor. The best learning opportunity is experience, and it's better to gain experience with an award-winning platform like Libertex.

Here are the answers to some questions you may have.