Many people do not understand the difference between investing and speculation. There is a thin line between the two terms, which is not defined clearly. Lack of knowledge leads to confusion as most of the speculators tend to call themselves the investors, which may be harmful in the long run.
There is a profound difference between the two terms and let us understand this with a simple example:
Suppose there are two individuals – Ram and Ramesh, who want to foray into the fruit juice distribution business. Both of them follow different approaches to start their business.
Ram visit the owner of the company and discusses the various important things like:
- The total turnover of the business
- How the distribution service actually works
- Total sales recorded in a month
- Total number of vendors associated with the company
After discussing the above things, the next thing Ram does is to check out the financial statements of the company, examines the assets and liabilities, balance sheet, income statement, etc. After Ram is fully satisfied, he then decides to enter into the fruit distribution business.
On the other hand, Ramesh comes to know from the unknown sources that the prices of the fruit juices are going to rise in the near future. He just believes the news without any research work and enters into the juice distribution business with an anticipation to earn quick profits.
Now, can you tell me who was successful enough to earn the consistent returns after entering into the business? Ram or Ramesh?
Yes, you guessed it right. Ram!
Ram made an investment after carrying out the comprehensive research work and Ramesh just speculated and faced a considerable amount of the loss. Similarly, if you are planning to earn some extra money through the stock market, then it is important that you must understand the basic difference between the investment and speculation.
Points of Distinction Between Investment and Speculation
Any kind of financial decision that is taken after the thorough analysis work is known as an investment, whereas acting upon the news or rumors and not conducting any research work is called a speculation. The other points of the difference between the two are as follows:
- An investor analyses the total turnover, past performance and other prominent things of the business before making an investment. On the hand, when a stock is purchased on a speculation that it will rise in the future, then an investor is taking a gamble that may lead to profits or losses.
- In the case of an investment, the returns are consistent. On the other hand, the returns in a speculation are unstable and sometimes lead to huge losses.
- The investors enter into the stock market to attain their financial goals that can be a short or long term, whereas the only motive of the speculators is earned quick money in short time.
The Bottom line
It is entirely your decision, whether you want to make a sound investment in the stock market or just speculate. It is imperative that whatever decision you take, must be beneficial for you. If you are a new investor, then there are chances that you may get confused a little. In such a situation you can make use of your smartphone, by downloading the top stock market apps, providing you with the quality advice and help you take the right decision.