Are You Investing In The Stock Market Or Speculating?

Yes, you read that right. Stock Market Investing and Speculating are two different things. While it is easier to get them mixed up, in most cases speculating in stocks leads to losses. But then why do people do it? And more importantly, how do we understand the difference between investment and speculation? Let’s understand this in more detail:

How Is Investment Different From Speculation?

In simple terms, Investment in stocks is a process where you carefully select stocks that will help you create wealth over the long term. Hence, Investment may not give an instant or Short term returns. Whereas, Speculation is only about the fluctuation in the price of the stocks. A speculator does not look at fundamental aspects of a particular stock. The only aim for a speculator is getting short term returns.

Clearly, looking at these two approaches, speculation will lead to extremely high-risk exposure and hence, may result in extreme profit or loss. But with Investments, that’s not the case because it’s done with a logical approach and with a long term investment horizon.

Speculation Resulted In The Great Depression in 1929. Here’s How:

The largest fall in New York Stock Exchange Was caused due to Speculation and it resulted in The Great Depression. During the 1920’s most of the investors made great returns by investing in stocks. Looking at these returns, many new investors felt left out and they got into the stocks aggressively to take advantage of the rising stock market. Slowly, as markets continued their move in an upward direction, investors bought the stocks on borrowed money.

But these investors did not understand the inherent risk of this speculation. The easily available borrowed money was getting in stocks and it created a bubble that was about to burst.

By 1929, the economy was not doing well with a fall in industrial production, a fall in wheat prices, etc. As the stock prices started going down, the investors started selling shares to reduce losses since they had borrowed money. This resulted in heavy selling And markets continued to fall for the next 3 years with a total fall of 89.2%.

Investing Is A Better Approach For Long Term Wealth Creation Than Speculation

For retail investors who are just entering the stock market, starting with speculation can be extremely risky. Looking at examples of stocks that made quick gain is easy but the risk involved in such stocks is very high. Hence, while starting your investments, doing so in fundamentally strong stocks can help you in creating wealth over the long term.

Stock markets are very unpredictable and unless you experience the volatility, you do not understand your own risk tolerance. Going through market volatility can get challenging for new investors. Hence investing in carefully selected stocks is a better approach than looking for making a quick buck using Speculation.

Do You Still Want To Go The Route Of Speculation? Here’s What You Can Do

If you still want to try your hand at speculation, you can do so but with certain limitations in place. Figure out an amount that you will be okay losing completely. By doing this you will ensure that you don’t put major capital into speculating and hence have a sufficient corpus set aside.

Now only put this amount in your list of stocks that you have speculated. While shortlisting these stocks, try to find some reasoning to put money into them instead of pure speculation so that even if they go down, you will know if they have the potential to give good returns.

A Famous American Economist and Nobel Prize Winner Paul Samuelson have accurately explained what Investment is :

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”