Investing vs Speculating: How to Tell the Difference

When it comes to investing, the internet is saturated with information - including a lot of misinformation - about where you should invest your money. While there are plenty of solid investment opportunities available, there are some speculative investment options that almost sound too good to be true which can suck people into making uninformed decisions. 

In this blog, we’ll unpack the difference between investing and speculating and help you choose a strategy that works for you. 

What is investing? 

Although it can be complex, investing is the practice of exchanging money for assets that you can reasonably expect to increase in value over time, resulting in a capital gain. Some other characteristics of investing are: 

Long-term focus 

When you invest, you invest with the long-term in mind. Prioristising long-term potential over short-term fluctuations is crucial for investors, whilst also understanding how volatile the share market can be. 

Appropriate risk management by diversifying investments

For those looking to invest in the property or stock market, diversification of your portfolio is one of the most important aspects. Investors assess and manage risk by diversifying their portfolios across different asset classes and industries. The primary aim here is to minimise the impact of market downturns on their overall wealth.

Thorough research into financial situations, investment markets, etc

Whether you’re starting or adding to your investment portfolio, you should conduct thorough research into the financial health, management quality, competitive positioning, and growth prospects of companies or assets before making any solid decisions. The team at Inovayt has a wealth of knowledge surrounding the investment markets and is happy to assist you in your decision-making. 

Incorporate active and passive investment strategies

Investors can incorporate passive strategies such as index investing, where they aim to match the performance of a broad market index, or active strategies, where they actively manage their portfolios to outperform the market.

What is speculating?  

On the opposite side of the spectrum to investing is speculating which is the act of buying assets with the hope of substantial gains often entering and exiting several times in very short periods. 

Some other characteristics of speculating are:

Short-term focus

Unlike investors, speculators seek to capitalise on short-term price fluctuations, often buying and selling assets within days, hours, or even minutes. They thrive on market volatility and aim to profit from price momentum. 

High risk, high reward

Speculating can yield substantial returns in a short period, but also comes with high levels of risk. Speculators may experience significant losses if their bets don’t pay off as expected.

Technical analysis 

Speculators often rely heavily on technical analysis, using charts, graphs, and statistical indicators to identify patterns and trends in asset prices.

Leverage and market trading
 

Speculators often use leverage to amplify their trading positions, borrowing funds to increase their buying power and potential returns. While leverage can magnify profits, it also amplifies losses, increasing the risk of margin calls and liquidation.

What is the difference between investing and speculating?

The main difference between investing and speculating is the amount of risk involved. Investors tend to take a systematic approach to growing their wealth, buying assets with reasonable levels of risk in exchange for long-term growth. Speculators, on the other hand, buy assets that may experience rapid growth but can also lose their entire value if they go out of favour.

Types of investing

If you’re looking to create an investment portfolio, it can be difficult to know what you should invest in - especially if you’re just starting. Here are some of the different types of investment. 

Bonds

Bonds are types of debt that allow businesses to fund their operations. In return, these bonds can pay a modest rate of interest. Investors typically favor government bonds, corporate bonds, plus bond ETFs and mutual funds.

Real estate

Real estate is one of the most common types of investment, particularly due to its stability. However, while real estate is a relatively stable investment, it’s still important to understand the risks involved when investing in property. 

High-quality stocks

When investing in the stock market, you’re buying a piece of a publicly traded company.  In the world of investments, this category typically refers to blue-chip stocks of well-established companies. It can also encompass investments like stock ETFs and mutual funds.

Types of speculative investing

Speculative investments, while still legitimate investments, carry a much higher level of risk. These types of investments include the following: 

Cryptocurrency 

Cryptocurrency has risen in popularity significantly in recent years. It has some great advantages including ease of currency exchange and transaction speed. Although some cryptocurrency investors have made large sums of money, many others have lost larger amounts. 

Commodities 

Commodities are unbranded goods like oil, gold, silver, and agricultural products such as corn and soybeans.

Artwork 

Investing in artwork is popular in certain circles due to its potential for rapid price appreciation. However, the fluctuating popularity of artists and artistic styles can result in a previously valuable piece attracting minimal interest from buyers.

Collectibles 

Collectibles include a wide range of items that people enjoy collecting, including trading cards, toys, and comic books. Like artwork, the popularity of these items can rise and fall swiftly.

Can an Inovayt financial advisor help me with my investment strategy?

Our financial advisors have extensive experience in investment portfolios to suit a variety of financial situations. Whether you require assistance setting up an investment or are after some help maintaining your current portfolio, our team is here to guide you. Get in touch with us today.