The terms “Speculation” and “investment” get thrown around a lot, often being used interchangeably. It’s important to understand the distinction between these two terms. New investors often get sucked into speculation, while thinking they are involved in traditional investment. This is not to say, however, that speculation doesn’t have its place in an investment porfolio. However, understanding the difference between a traditional investment and a speculative one can help you achieve a proper balance within your own portfolio.
Speculation can be an investment, in the sense that money is spent on something in the hope of achieving good returns. Speculation tends to refer to high-risk investments, though, which is why a different term is used. A speculation is typically made based on limited information.
Examples of common speculative investments include Gold, Forex, and certain categories of real estate purchases. This is not to say that these are always poor ways to put your money to work. They should merely be balanced with more conservative investments, at least if your hope is to achieve predictable returns over a long period of time. Speculative investments can also help an individual learn more about investment. The best Forex platforms for beginners, for example, give new investors a close-up look at the value behaviors of a variety of financial options, the knowledge of which can help build sound investment theory over time.
The line between investment and speculation is not hard and fast, but typically investments are considered such when they present low, measurable risk to the investor. Common investments like ETFs often involve dozens, hundreds, or thousands of company stocks. This huge diversification within a single security is a way to provide steady growth for investors who are not attempting to “getting rich quick” but just realise solid returns. Investments might not have the prospect of overnight success quite like a hot new speculative opportunity, but they are much less likely to suddenly fail as well.
In general, it is a good idea to avoid speculative investments unless you are already well diversified with sound investments, or you are prepared to lose the money bound up in the speculation in the hope of making a big hit if things go well. If you are a new investor trying to determine whether a financial opportunity is an investment or a speculation, think about how much information you have and how well you understand it, as well as how much personal control you have over the outcome.
For example, you might want to invest in a new clean energy company because their industry niche seems ripe for growth. But without clearly understanding their place in the market, their business model, and many other factors, it is hard to know whether that company is going to sink or swim. To invest in a fund that includes many such businesses might be a more sensible investment.
In the end, there is no hard and fast rule about investments vs. speculation. Each investor needs to balance risk and potential reward when evaluating financial opportunities. However, it is important to understand the distinction between these categories so that a speculation is not mistaken for a solid investment.