Investing vs Speculating: Choose Your Financial Strategy
Before you start your path in the financial market, you should determine who you are: investor or speculator. If you look closer, there is a distinct line between them. In this article, we will find out how to decide which strategy applies to you.
Investing: Meaning and Pros/Cons
Investing means purchasing and holding an asset for the long term (at least one year), which is supposed to bring stable income in the future. 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 analyze sectors, trends, and patterns of the chosen market.
To evaluate an investment, investors need to deeply analyze 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.
|Investment Benefits||Investment Drawbacks|
Best Instruments to Invest
Here is the list of the perfect instruments you can invest in, even if you are a beginner investor.
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 will 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 risk but a small one. You can predict your earnings by investing in blue-chip stocks. Blue-chip companies have a national reputation for quality, 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 is not the case. Every speculation activity requires thoughtful analysis. The main idea of speculating is to bear high risk for a higher return.
Let’s look at an example. There is a small fintech company and it seems to be getting successful due to the popularity of the industry. Nevertheless, the company is rather new, and there is intense competition. There is 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 will catch this chance as there is 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.
|Speculation Advantages||Speculation Disadvantages|
Best Instruments to Speculate
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. A usage of leverage is always speculative. However, trustworthy brokers may lower risks and help increase profits. These markets are some of the most unpredictable examples that increase the possible return.
Short Selling. When shorting stocks, there is 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, or cannabis stocks. The funds won’t be qualified as investments until the companies bring a profit. New industries give you an opportunity to enter the market at a low price and exit with an enormous profit.
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, rumors, and huge volatility. There are two types of speculative trades:
Day traders. Such traders can be considered as speculative ones 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.
|Time||Long-term investments (more than one year)||Short-term (less than one year)|
|Aim||Savings for future||Fast profit|
|Attitude||Cautious and conservative||Aggressive|
|Decision making||Fundamental analysis, less technical analysis||Technical analysis, market sentiment, less fundamental analysis|
|Return||Modest||A high rate of return|
|Examples||Government bonds, blue-chip stocks, saving accounts||Options, Forex|
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.
However, investors can be more certain they will get the capital, with a high rate return, than speculators do. There is a 50% chance the speculator will lose funds. Investors may lose money only if something unexpected happens in the market — for example, pandemic or financial crisis.
Speaking about 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 in less than one year. Moreover, any investor aims to save money for the future and avoid money depreciation. Speculators look for fast gains.
The investor's attitude is considered to be cautious and conservative as long-term investments require in-depth analysis. They are 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 high profit, they need to enter the market at a perfect level. Thus, speculators consider technical levels and also rely on market sentiment. Rumors 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 are 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 do not 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 as buying a company’s stocks is usually considered as 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 earning and the company’s advantages. So, you are not a speculator anymore. You are an investor.
Another example is a hedge fund. This instrument can be used both to hedge risks against a market crash or high volatility and speculate. Real estate is basically an investment that will bring profit in the future.
However, it becomes a speculation if it is profitable if only its resale value rises. Venture capital funds mostly invest in startups which are speculative. Nevertheless, if the fund diversifies by investing in plenty of startups, it can be considered as hedging that relates to investing.
How to Speculate Professionally
A lot of 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 will 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 analyze 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 will fail. Every speculator knows that news and rumors 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. Libertex offers an extensive range of leverage from up to 1:30 for retail clients to up to 1:600 for professional clients.
Here are the answers to some questions you may have.
What Is Speculation in Forex?
It’s the act of buying or selling a foreign currency based on fundamental or/and technical analysis. Forex speculation has a high risk due to the uncertainties on the upcoming market moves but promises high profits. Trading through a reliable broker as Libertex lowers the risks.
Why Is Speculating Considered Risky?
The core element of speculation is the uncertainties of the possible gains and losses. These uncertainties are not random; they are based on real facts. Thus, a person either accepts them or not. Uncertainties in any type of activity is associated with risks, it's the same in speculation.
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 are a risky speculator or conservative investor. The best learning opportunity is experience and it’s better to gain experience with a reliable platform such as Libertex.
Why to trade with Libertex?
- libertex offers all its affiliates:
- access to a demo account free of charge
- technical assistance to the operator 5 days a week, 24 hours a day
- leverage up to 1:500
- operate on a platform for any device : Libertex and Metatrader 4 and 5
- no commissions for extractions in Latin America