The difference between speculation and investment
Investment refers to the process of buying assets with the aim of holding them for long periods of time until their value increases gradually, while speculation refers to reaping profits from short-term transactions. The difference between speculation and investing in general is the level of risk involved in each.
The investment usually extends over the long term, and the investors generally aim to obtain safe and stable returns, unlike speculators who bargain for safety in exchange for quick returns.
What is investment?
Investors allocate a portion of their money to buy and invest assets in the hope that they will generate stable income or increase in value in the future. The term is widely used because it affects everyone who wants to establish their own financial future. Some common examples of investing include buying stocks, bonds, real estate, gold, mutual funds, and so on.
An investor might, for example, buy a share of Company A for $4 in the current market in the hope that it will increase in value to $8 or more after 5 years.
The concept of investment is not limited to the world of money only, but it can also include other aspects of life. Other types of investments may consist in learning an additional language or using used goods to produce other new goods.
Sound investments encourage economic growth. Purchasing new equipment to improve the overall output within a company increases the country's GDP. There are two types of investments, namely conventional and alternative investments.[1]
traditional investments
• stock
• bonds
• Fixed Deposits
• savings funds
• Gold and Jewelery
alternative investments
• Real estate
• Private Equity Investments
• Antique Collectibles
• Plates
• Hedge Fund Investments
• Structured Products
Investing is one of the most important aspects of financial planning that allows you to be sure of the productivity of your money and the chance of achieving your future financial goals. Unlike saving, investing will gradually multiply your money over the coming years. Here are some of the most important other reasons that may motivate you to invest:
• Investment ensures the growth and multiplication of funds instead of keeping their value fixed in the bank account.
• The investment can secure the future of an entire family in terms of expenses for education, marriage and children.
• Investment allows you to deal with inflation effectively. The value of money decreases with the high rate of inflation, but you can control it by investing your money instead of saving it.
• Investment is an effective way to gain accumulated wealth.
What is speculation?
Mudaraba does not have a precise definition, but it generally refers to buying short-lived assets and making a quick profit from them. Speculation involves a high level of risk and uncertainty about returns. It is a game of probability.
Speculators usually make their decisions when the odds are in their favour, which is a rarity. This process always takes place in an atmosphere of panic and confusion. But if luck plays into their favour, they will be able to win huge amounts of money. If the stock market is going through a bullish phase, for example, and the scenario looks optimistic, the chances of falling are relatively less, but speculators' love of adventure pushes them to place their bets even when a bearish phase is expected.
Despite the negative opinions about speculation, it provides much needed liquidity in the market, which is necessary to achieve the level of efficiency. In the commodities sector, for example, food companies and farmers with limited investment capacity and risk tolerance cannot be relied upon to provide high liquidity.
The difference between speculation and investment
1- The main difference between speculation and investment lies in the length of time in which the assets of each are kept. Investments are held for more than a year, while speculation is held for a short period of time not exceeding a few months.
2- The second difference between speculation and investment is reflected in the level of risk, which is relatively moderate for investment versus speculation. Many investors belong to the middle class, which makes them look for a safe option against speculators who aspire to risk their money in return for high returns in a short period of time.
3- Investors usually invest from their own money, while speculators use borrowed money.
4- Investors expect to benefit from the change in the value of the asset, while speculators focus on profiting from price changes due to the influence of supply and demand forces.
5- Investors do extensive research and focus on the fundamental factors of the company, such as financial position, ratio analyzes, etc., while speculative decisions are taken quickly.
6- Investors focus on investing in blue-chip companies like stock market, bank savings account, provident fund, etc., while speculators focus on areas like commodity market, options trading, betting etc.
7- The level of patience and sacrifice is very high for investors compared to speculators, although the possibility of losses multiplies in speculative activities.
8- Speculation requires large sums of money compared to investment, which depends on the ability of an individual or a company.
important note
Speculation should not be confused with gambling. Gambling involves putting your money into an event whose outcome no one knows in the hope of winning more. A gambler might consider putting his money into American roulette rather than speculating in the commodity market. The payout will be only 35 to 1, while the odds of winning are 37 to 1. So if the bet equals $5 on a single number, the potential income is $175, but the odds of winning this amount is 1/37, and he could lose $5 If the specified number is not reached.
a summary
The fact of the matter is that both speculation and investment involve guessing and predicting the future course of events and acting accordingly. So it is important to be aware of the pros and cons of both options before making any decisions.
You have to know that the field of investments is full of speculation, whether for speculation or investment, and the goal of both is to earn profit. What you should consider when making your decision is your goal and the level of risk you can take.
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