Does slow & steady win the race? Or fast & flashy?

Should You Be Investing in Stocks or Speculating?

May 2 by Stevan

These are two terms you sometimes hear being used interchangeably: speculating and investing in stocks. But there are major differences between the two even though they sound like the same thing.

The two main factors that set them apart are time frame and the level of risk involved. Basically, how long are you putting money in the stock for, and how much risk are you able to stomach? Ultimately, which approach you take will have a huge impact on your stock portfolio.

If you don’t know whether you’re an investor or a speculator – or which style is best for you – then you’ve come to the right place.

Investing in Stocks: Slow and Steady

These days, we’re all “investors” making “investments.”  You may even try to explain to your other half that the classic MGB Roadster you have your eye on is an “investment.” Anyone who owns a share of stock is frequently called an investor. But what does investing in stocks truly mean?

Well, if you’re a true investor, you don’t pull out of a stock just because there’s volatility. Even if you’re one of those who believe a stock is bound to rise over time, the reality is that it’s never a straight line up. Long-term investing is about sticking with the stock through its ups and downs, as if you’ve exchanged wedding vows.

Investors don’t rush into and out of stocks with short-term profits in mind. Instead, they think about long-term prospects. They do their homework on businesses before buying stocks (this is called fundamental analysis) and examine factors like financial health and track record.

investing in stocks vs speculating

When you start geeking out on a company and before you know it, you’ve gone 5 days without a shower or a shave…

Even when the share price fluctuates, investors will typically hold onto their stocks so long as the fundamentals don’t change. Unlike speculators, they are guided by facts and figures, less by their emotions.

A famous investor is Warren Buffett, who’s held some stocks for decades. If you want to copy the Oracle of Omaha’s investing style, just remember these three little words: value, growth and income. Buffett hunts for stocks he believes are undervalued and have good long-term growth prospects. Many stocks in his portfolio also give out juicy dividends which can be an additional source of income. (You can read more about how to build a successful stock portfolio like Buffett here.)

Though you might not be able to make a quick killing with investing, you may be able to build wealth over time.

Investing in stocks vs speculating

Keep that investment growing

But if you have no patience to hold a stock for the next forty years like Buffett does, then perhaps you might want to consider…

Speculating: No Pain, No Gain

Ever heard the phrase, “Fools rush in”? Well, speculators will beg to differ.

Unlike investors, speculators are more likely to flock to a stock because of news, rumours, trends or a gut feel. They’re not as concerned about whether a company is fundamentally sound. Their method is to anticipate sudden price movements and turn a quick buck from it.

See, speculating is all about playing mind games with the stock market. Speculators try to anticipate what psychological effect an event or news will have on the market, triggering them to either buy or sell collectively. For instance, you may have a strong hunch that Apple is likely to report higher-than-expected earnings. So you buy its stock right before the numbers come out, with the hope that you can profit from the price jump.

When someone asked Speculator Steve where he thought Apple’s share price was heading

Speculating is often synonymous with trading. Day traders are called such because they tend to buy and sell within the same trading day, often thriving on volatility. Some people find this a way more exciting way to participate in the stock market.

But speculative trading can also be risky business – with high gains come high stakes. That doesn’t mean you should equate trading with gambling. Experienced speculators take calculated risks and make responsible trading decisions. They do not “go all in” with their rent money. (Let that be a warning to you.)

Some say billionaire magnate George Soros (one of the top Stock Market Villains) is the world’s #1 speculator. He has raked in a fortune from speculating on currencies.

Investing in stocks vs. speculating: Which style’s for you?

Now that you know the differences between the two, your next question may be: “Investing in stocks or speculating – which one is better? And which one should I go with?”

Well, do you really have to choose when you can be a stock market omnivore and dabble in a bit of both?

 Why choose when you can have both?

While it’s hard to predict short-term price movements, you also wouldn’t want to keep all your cash tied up in one or two stocks for the long term. So what do you do then?

I have three words for you: Diversify. Your. Portfolio. If you’re a conservative sort of  investor, think about including some speculative stocks in your portfolio. These can potentially give you higher returns in the short term. On the other hand, if you’re purely a speculator, why not manage your risk by investing in stocks with a relatively consistent performance? 

It’s all about balancing your short-term and long-term financial goals. First, figure out how much risk you’re able to swallow before you break out into an anxiety rash. Next, ask yourself what you want to achieve. (Be realistic with your goals though!) Then review your portfolio regularly to see whether your strategy is working. Or if it’s time to ditch it or switch things up.

Whether you’re an investor or a speculator – or a hybrid of both – setting boundaries for yourself will make trading decisions a hell of a lot easier to make. Now, go forth and build that portfolio!

Written by

Stevan

'The Ted Langenbach of the markets'.

Disclaimer: All views, opinions or analysis expressed in articles are that of the author and do not represent the views of BUX. Neither BUX nor the author provide financial advice and these articles should not be construed as such.

All posts
Learn to Trade

Dividend Payout Ratio: Math Skills Not Required

February 17 - Jitan Solanki

There's a way to see just how well your investment is being spent and it's called the dividend payout ratio. Before you think this will be as difficult as learning to speak Latin, fear not because we break down what the dividend payout ratio is and how you can calculate it - even if you failed math in school!

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 82.3% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.