Which one are you doing?
The main difference between speculating and investing is the accumulated information behind the investment decision and the risk. It is no surprise that investors want to make a profit off of the money that they invested and get their principal back.
Investors take on some risk but make investments based on research and analysis and have a level of certainty that they will turn a profit. Whereas speculators take on a high amount of risk based on a theory or hope that they will make a large return. Speculation is usually a more short-term endeavor and entails chasing a higher return knowing there is a chance they could lose their initial investment.
Examples of Investing and Speculating
While all investments have some risk, the likelihood of making a profit can generally determine if you are just speculating or making an investment. Reviewing historical data on an investment can help you to analyze the trends and outcomes. And while past performance cannot predict the future, utilizing fundamental analysis and ensuring solid balance sheets before investing can provide a solid foundation for determining the probability of success and risk assessment. Examining the balance sheet of a company is one way to get a “snapshot” of a company’s financial position because it reports their assets, liabilities, and stockholders’ equity. And fundamental analysis is a way to evaluate the value of an asset and factors that could influence its future price such as the economy, the political landscape, and how competitive a sector is.
These examples are usually representative of investments:
- Mutual funds
- Savings accounts
- Government bonds
- Value stocks
- Blue chip stocks
- Private equity funds
- Retirement plans
- Passive investing / ETF investing
These examples are usually more speculative in nature:
- Short selling
- Startup investing
- ETFs that invest in new industries
The Gray Area
Some investments can range from traditional investing into more speculative in nature. The person and process that went into the purchase can determine if it is an investment or a speculative bet. If you buy a stock based on a hunch or personal opinion then you are speculating. If you have done sound research and focused on the fundamental factors of the company, such as the financial position, analytics, etc. then you are investing.
Working With A Professional
Many investors work with a financial advisor so they can utilize a professional who will do the research and analysis for them. Brentwood Financial Advisors evaluates each investors goals and risk tolerance to tailor a financial plan that aligns with their needs.