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What is Speculation and Investment? Speculation and investment in stocks bring great profits in the stock market?
Speculation and Investment are two separate concepts. They have similarities and differences. If you have questions about this, please join me in learning what speculation or investing is, and why you should or shouldn’t do these activities.
Watching: What is speculation?
● What is speculation?
Speculation is the purchase of an asset (commodity, commodity or real estate) with the hope that it will become more valuable in the near future. In finance, speculation is also engaging in risky financial transactions in an attempt to profit from short-term fluctuations in the market value of a tradable financial instrument, rather than attempting to profit from the underlying properties expressed in the instrument such as value incurred, return on investment, or dividends.
Many speculators pay little attention to the underlying value of a security and instead focus exclusively on price movements. Speculation can in principle involve any tradable financial instrument or commodity. Speculators are most commonly seen in the markets of stocks, bonds, commodity futures, currencies, art, collectibles, real estate and derivatives.
Speculators are one of the four main players in financial markets, along with hedging investors who enter into transactions to offset some of the risks that already exist. arbitrage seeks to make a profit where an instrument is trading at different prices in different markets, and investors seek to profit from a fundamental characteristic of the financial instruments they own for the long term.
● What is investment?
Investment has a very broad connotation. An investment is the investment of money to start or expand a project – or to purchase an asset or stock – where those funds are put to work, with the goal of generating income and increasing value in return. time.
“Investment” can refer to any way used to generate future income. Financially, this includes buying bonds, stocks, or real estate. In addition, a constructed building or other facility used to produce goods can also be considered an investment. The production of a good that is necessary to produce another good can also be considered an investment.
Acting in the hope of increasing future sales can also be seen as an investment. For example, when you choose to attend a higher education program, the goal is often to increase your knowledge and improve your skills with the hope of ultimately generating a higher income.
There is a huge difference between investment and speculation. When you speculate, it means that you are willing to take a huge risk that comes from the uncertainty of the possible future profits. The risk also comes from the value of your loss in the worst case scenario.
Here are some characteristics that will help you to distinguish between speculation and investment.
To make them easier to remember, I have listed them in the summary table below for easier reference:
Investments Speculative Meaning Buy assets/stocks for a stable return Carrying out risky financial transactions with the goal of seeking profit Long-term (20-30 years) Short-term (less than 1 year) years) Level of risk Medium High Equity Investors’ own capital Borrowing from others Attitude Cautious Bold Decision factors Fundamental factors such as business results of the company, industry, … Technical chart analysis, market sentiment, personal opinion Desired profit level Low and continuous Very high
￭ Investing involves buying an asset with the hope of securing a return on the principal amount in the future. Speculation involves making a risky financial transaction with the aim of making a large profit from a trade.
￭Investments are usually made over a long period of time usually more than a year. Cases such as real estate and life insurance are managed for 25-30 years. Speculation is made over a very short period of time usually less than 1 year and possibly even within an upcoming event.
￭The risk associated with investment is relatively low compared to speculation. Since investing is done largely by the middle class, they will use the leftovers from their hard work and hope to earn a steady return. They are willing to switch from saving to investing if the investment gives a certain return. Speculation will focus on obtaining high returns in a relatively short period of time and therefore the risk is very high.
An investor will use their own capital to invest while speculators will use borrowed capital and attract borrowers with attractive returns.
￭Investors will generally take a cautious and conservative approach while considering investments along with the risk appetite they may have. accept. Speculators have relatively more optimistic beliefs along with a less cautious attitude. Since the returns are so attractive and the window of opportunity is very small, this behavior is easy to notice.
￭Investors expect to profit from a change in the value of an asset while speculators focus on making a profit from a change in the trading price that occurs due to the forces of supply and demand.
￭ While making a decision, investors will conduct extensive research and focus on the fundamental factors of the company such as financial position, ratio analysis, etc. while speculative decisions are based on technical charts, market dynamics and personal opinion.
￭ Investors will focus on large companies of the stock market, savings funds, etc. while speculators will focus on areas like commodity markets, options trading, etc.
Investments do not give rise to forms such as insider trading or information leakage, which can be seen in speculative activities because the profits from them are very large.
￭The degree of patience and trade-off is relatively large in investment, in speculation it is not even though the probability of loss is many times greater.
All stock market movements are based on the millions of transactions that occur between buyers and sellers every day. Each of these buyers and sellers has different reasons for their activity, but in part is based on speculation.
In the stock market, speculation is the prediction of the future price movement of a stock based on the belief that the market has incorrectly priced the stock. Speculative trades often involve companies with high levels of risk and high returns.
This means that there is a lot of risk in investing, to the point where one can lose a significant amount of money, but if the trade goes well, it can increase in price quickly and make a lot of money in the future. short time.
A popular form of speculation today is the use of contracts for difference (CFDs). This way of speculation has the benefit that speculators do not need to hold assets that they predict are about to move in price (called the underlying). What they need to do is create a buy-sell agreement with an investor who speculates against their own on the direction of the asset’s price, or with a broker. At the time of the agreement, the profit or loss will be calculated and determined.
CFDs provide the opportunity to trade in both directions of the market and make a profit.
CFDs are a type of leverage-based financial derivative. It is a high-risk speculative tool, requiring investors to understand the nature and level of risk that they can accept. At the same time, CFDs provide investors with access to all types of assets and markets.
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If you pay attention, you will see a lot of investors putting their money in the following assets:
Savings accounts are one of the safest types of investments. If you invest in a savings account, your money is almost certainly safe and you know the interest you will earn. Most savings accounts are guaranteed by governments up to a certain amount.
￭Government bonds issued in developed countries are also very safe. A government can print money to pay back the principal. This can weaken the currency but in return it is very safe.
￭Bluechip stocks (large companies) carry some risk but are generally considered safe and have predictable earnings. Blue-chip companies are very unlikely to go bankrupt, although their value can drop in any given year. A portfolio with blue-chip stocks is less likely to depreciate over a five to ten year period.
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￭Value stocks are considered to have limited downside. If a stock is trading below its intrinsic value, the worst case scenario is that the investor will only be entitled to the liquidation value of the company. Value investors seek to limit devaluation first, then make a profit.
￭ Stocks with low P/E ratios are not always value stocks. One of the most common investing myths is that a stock with a low P/E is a good investment. While some stocks with low ratios are good, many stocks are cheap for a reason. Likewise, some of the best performing stocks have high P/E ratios. Although the depreciation of value stocks is limited, investors will only make a profit if the prospect of Companies improve and the market realizes it.
￭Passive investing and investing in ETFs (index funds) are generally considered investments rather than speculation. A weighted market capitalization ETF will always contain the most valuable stocks in each market. The probability that investors will benefit from owning the best stocks for a long time is high. However, actively traded ETFs are speculative.
Retirement funds, balanced funds, and annuities are relatively safe investments. Most of these long-term savings products are tightly regulated to ensure that capital is not invested in speculative instruments.
￭Mutual funds are largely considered investments. However, some funds are highly speculative depending on the strategy they follow or the instrument they invest in. Actively moving money in and out of mutual funds is also speculation.
￭Private mutual funds invest in private companies with proven business models. In fact, private equity funds typically invest in companies when their speculative phase is over. They accept lower returns but have a higher success rate than venture capital funds.
So what about speculators? Do you wonder how they are doing to get many times higher profits? It is not uncommon for forms of speculation to appear around you every day:
￭Derivatives, including options, futures and CFDs, are commonly used for speculation. The application of margin trading to any financial instrument is speculative. Even if the underlying asset can be considered an investment, the use of leverage will often create a derivative speculation.
Short selling is usually speculative, unless it is part of a hedging strategy. When you short a stock, you can never be sure the price will fall. When too many people are short, oversold conditions often occur, prompting investors to buy back their shares at a higher price.
￭Start-up investment is generally very speculative. Startups with little or no revenue and no track record. It is not until their business model is proven that there is certainty of profitability.
￭ETFs that invest in new industries are often speculative. Recent examples are funds that invest in cannabis stocks, cryptocurrencies, and blockchain technology. At times, these funds may qualify as investments, but until the companies are profitable they are still speculative.
Mining stocks are stocks of companies that seek and exploit new sources of energy or minerals. These companies can be very profitable if they find new reserves. However, there is no guarantee that they will “make gold” or that the reserves they find will be enough to offset the exploration costs.
￭Biotech stocks are mostly speculative. These companies only make a profit if the drugs they develop for it pass clinical trials and get regulatory approval. Until that happens, the level of certainty is not high.
￭Some investment transactions are speculative, such as acquiring a company when it is anticipated that it will be merged. Or bet on the recovery of an insolvent company. Investing in anticipation of regulatory changes, or central bank operations, is also speculative.
Every professional investor understands that sometimes speculation is necessary to increase the returns of a portfolio. However, as the rate of speculation in the portfolio increases, so does the volatility and volatility of returns.
Some instruments, assets and funds may include both investments and speculations. Knowing how to distinguish between the two will help you decide on the right portfolio ratio for each.
You already know that risk always comes with reward. Is there a way to monitor and calculate the risk? In financial markets, risk is understood through volatility in the returns of assets, or securities.
►Standard Deviation of Rate of Return
The standard deviation, or sigma (pronounced sigm), is a statistical probabilistic tool for calculating the volatility of a stock. Specifically, it measures a stock’s volatility relative to its average return over a period of time.
To come up with a trading price, investors have created a formula that uses standard deviation and expected returns. The higher the standard deviation or risk, the higher the expected return.
Each stock has a different sigma over a particular time period, and so your expectations as an investor should reflect these differences. An unusually high sigma, such as the sigma for many cryptocurrencies, can signal whether an asset is investment or speculative.
During periods of high market volatility due to social issues such as wars or natural disasters, every asset class is subject to a higher level of risk. So these are also the periods when investors with a solid strategy and psychological stability can achieve much larger profits.
►Determine the level of risk and investment objectives
Learn how to invest professionally, always knowing the level of risk you can accept along with your desired return target. This is the principle that all billionaire investors recommend.
Determining your level of risk has a lot to do with knowing your finances, your diversity of income sources, and your ability to manage your portfolio. Even if you have a lot of money to be able to diversify your portfolio, without enough time and knowledge to manage it, you will only increase the risk of losing your money. In contrast, moderate diversification reduces the risk of “putting all your eggs in one basket”.
►Without risk, there is no profit
It’s a principle that’s been proven over hundreds of years of investing history. Saving is an important goal, but it’s also a good idea to find ways to increase your wealth. Savings account interest can’t protect you from inflation, so you need to invest and speculate.
Even in times of increasing volatility with multiple asset classes, investors can still look to profit. The way to be able to take advantage of market turmoil is through active account management, rather than just passively relying on market index funds.
I believe that savvy investors make better investment decisions and that is why one of my core activities is to focus on education.
I encourage you to stay up to date with the latest market moves by reading our weekly recap of gold, domestic stocks, natural resources, politics… and more.
Whether you choose to invest or speculate, having enough knowledge and information is the key to success in the most sustainable way.
* Please note that any form of investment involves risk, you can click on Mitrade’s PDS to learn more about the risks involved in trading.
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The content of this article is for reference only and readers should not use this article as any investment basis. Mitrade does not provide financial advice and all products offered are on an execution basis. Consider your risk tolerance before entering the market. Mitrade is not responsible for any results based on the trading activity of others. Mitrade also cannot guarantee the accuracy of the content of this article.