People invest their moneys in different investment vehicles with the aim of making the best returns possible. Different investments however have different risk levels and therefore the investor has to consider his /her risk preference and investment horizon before deciding the nature of their investment. It’s advisable those investors consult their financial advisors before making any major investments. There are a number of investment vehicles that are available to the investors depending on the amount of money that they are willing to invest. An individual could decide to invest their moneys in the secondary markets or take advantage of initial public offers for firms that are deemed to be properly priced. This can be done either for the short term or long term investment horizons.
Investment can be defined as a rational and conscious decision by an investor to put money in a scheme with the aim of making gradual returns over a given period of time. Investors are characterized by a conscious and informed action to put money in a scheme with the aim of recouping dividends at defined periods. Speculation on the other hand is an opportunistic way of doing things (Bogle, 2012). The speculator puts in money hoping to get more than average returns on investment in a very short period of time. In most cases, speculators will invest their moneys in IPO’s or in companies in which they have inside information hoping to cash in after the happening of a particular event. With this background in mind, we can now explore in depth, the differences between investments and speculation.
Differences between investment and speculation
Investment is a rational action that is informed by understanding of past behavior of the share prices. Using such knowledge, the investor is usually in a position to determine future trends in the behaviors of the shares thus an informed decision can be made. By comparing the present price range with the future price ranges, it’s then possible to determine whether shares are either over or under priced and then the best course of action is taken from the point of knowledge.
On the other hand, speculation is premised on the hope that in future, prices will be significantly higher than the offer price and that it will be possible to recoup the initial investment and also earn a good return on the investment. This effectively means that a speculator is mostly concerned with the short run price behavior of shares so that he can dispose his securities before the price stabilizes and comes down while an investor is more concerned with the long run effects on the investment (Steinbach ,2008)
An investor consciously takes time to research on a particular investment, gather information and even to consult financial advisors. This means that an investor would form his decision based on a number facts and figures that are known and not misinformation. This involves analysis of the company’s dividend history, current EPS and price earnings per share for the recent past in order to determine whether the share is valued at a lower value as compared to future earnings or vice versa so as to decide whether to invest or not.
A speculator on the other hand does not take time to do all this. In fact, he bases his investment decisions on wild rumors and hearsay that cannot even be substantiated. This means that a speculator carries more risk on his speculation as opposed to an investor since he does not take his time to analyze his investment but just jumps in hoping to cash in after the share prices shoot.
One of the most important factors to consider when investing, this is the time when you as the investor expect to realize your investment. Investors are generally known to invest with intentions of retaining their investment for a longer time. This is because an investor is motivated by the earning of dividends over the period, besides the capital gains that obviously come with the increase in the value of their shares.
A speculator on the other hand is not interested in earning dividends for the long run. He is only interested in cashing in on the capital gains that accrue to him after the share prices have increased significantly. Speculation time horizon is usually between 1 day and three months at the maximum. Investors are usually guided by some insider information such as an imminent bonus issue, take over’s, rights issues, share splits etc. This means that the speculator will expect to benefit from the happening of these events and cash in on the resultant increased shares or price increases.
Research shows that true investors will tend to earn positive result in the long run. Information from many years in which research has been carried out and especially in the US and UK, long-term investment consistently produced a higher return than other similar investments in financial institutions. This means that basing arguments on research, an investor would be surer of their investments.
Speculation is not based on scientific or empirical evidence and as such, you cannot predict the results. It can sometimes produce quite high returns but in a number of cases, massive losses can result. In the long run, it’s likely to produce worse results as compared to true investments.
While all forms of investments are classifies as having a certain element of risk, investors can have a sound sleep after making their investments as they have an idea of the extent of their losses or gains way in advance. At the same time, their investments are for the longer haul so the investor can comfortably forget about the present turbulent market movements and concentrate on other issues for the time being.
Speculators on the other hand usually a lot of anxiety as they await the results of their investments. This is because there is very little, if any, element of certainty in speculation as the market players can always behave in a different way. The speculator must always be ready in case an action needs to be taken to maximize profits.
Speculation has everything to do with short term expectations. Speculators hope and anticipate that short term price fluctuations of a particular thing or stock or short term bond will work to their advantage. A speculator wants to make money very fast and wait for the next period.
Strategy. Generally, investors have a buy and hold strategy. Investors want to buy stocks and hold them so as to benefit from the long term gains and make profit while on the other hand, speculators interests lie in anticipating and profiting from market fluctuations.
In deciding which of these two strategies the best option is, an individual needs to analyze a number of issues. First and foremost is the availability and sources of funds. It would be suicidal for one to obtain a bank loan and gamble it in speculation. In case one loses the money, it could spell disaster as the individual would have problems repaying the loan.
Secondly, is the investor’s time horizon? If for instance I have just a small amount of money that I would require in the short run, then it’s better to speculate and recoup the investment in the short run and realize the money. However, if I have a lot of spare money that I do not need in the short run, then I may invest in the long run in a stable company and anticipate a long run return to my investment.
Based on these arguments, and the above supporting information, a longer term investment is more likely to yield positive results as opposed to speculation, even if the latter can sometimes yield very good results.
The difference between trading based on Fundamental Analysis and Technical Analysis
These two terns refer two different stock analysis methodologies that are used for researching an forecasting the trend of future stock growth. By definition, Fundamental analysis of stocks is a method that is used in evaluating a security by an attempt to measure its intrinsic value of such a stock (Dalton, 2008). Fundamentalists study the stocks using a wide range of information gathered from the overall economy, industry conditions and to the financial condition and management of the firm. On the other hand, technical analysis is the evaluation o a security by studying the statistics generated by the market activity such as volume and past prices. Technical analysts never bother to measure a securities intrinsic value but are instead interested in identifying the patterns and trends that are suggestive of the way the stock would do in future using charts. With this understanding, we should be able to now go deep into the differences between these two areas.
At the basic level, a technical analyst will approach a security from the charts while a fundamentalist will be more interested in the financial statements. By looking at a company’s financials which are the income statements, the cash flow and the balance sheets, a fundamental analyst is attempts to get a proper intrinsic value of the shares. This approach makes investment decisions quite easy to make.
Technical investors do not find a reason to analyze a company’s financials because all these are accounted for in the stock prices. They believe that all the information that they require about stocks can be found in charts.
Naturally, fundamental analysis takes much longer time as compared to technical analysis. While technical analysis can be completed in a matter of weeks, fundamental analysis takes a much longer period as data utilized is gathered for years. Numbers that are analyzed by fundamentalists are only released over long periods of time. For instance, financial statements are filed quarterly while changes in EPS do not occur on a daily basis like the prices and volume information that can be available each day.
Trading and investing trade off
Technical analysis as we have explained is a short-term method, with short term goals too. Generally, technical analysis is used for a trade, which is either a one off or a short term activity while a fundamental analysis is used to make an investment. Investors differ from traders in the fact that an investor would be interested in purchasing an asset that will be expected to increase in value while a trade is concerned with buying an item that he/ she will be able to sell at a profit (Thomas, 2009).
The technical analysis however, despite its disadvantages and shortcomings has a number of advantages that seem not to have been explored. Scholars seem to give too much attention to the fundamentalists view and this ignoring the technical analysis. This part seeks to amplify the advantages of this technique.
First and foremost, the charts used in technical analysis can provide a trader with a sense of market volatility, a very important aspect to consider when determining the market risks for any particular security.
Charts can also be used as timing tools, by effectively using charts; the trader is able to predict when a particular security will be well priced so as to make a good investment decision.
Technical analysis is also a very easy method of analyzing securities as it does not utilize so very many information. Even people with very little knowledge in finance would find it easier to utilize charts in their analysis as opposed to digging deeper into the information used in fundamental analysis.
Criticisms of Technical Analysis
Ardent believers in fundamental analysis see technical analysis as purely gambling. This is because any attempt to predict future prices is a form of gambling. They believe that technical analysis cannot in any way predict the market as it purports to.
Secondly, the world’s richest people such as Warren buffet have confessed to being fundamentalists and specifically shot down any advancements of technical analysis arguing that it’s not scientific and would lead to losses.
When to use
Fundamental analysis is very useful when there is a lot of information and time to analyze an investment. This means that all the available information will have to be put into consideration in determining the intrinsic value of a security.
Fundamental analysis is the most broadly used method even in Wall Street, because of the more objective methodology of arriving at a stock value. When investing huge sums of money in securities, conservative investors would like to use fundamental analysis as opposed to technical analysis as the risks are more reduced.
Technical analysis is very useful especially in short term investments, commonly known as trading since the investor is able to quickly make up his mind by virtue of the available information and its unsuitable for longer term investments.
Investing in the securities market
This is a time tested strategy that can easily earn an investor millions of dollars in a very short period. The strategy however requires in-depth analysis of the company’s fundamentals and is informed by data gathered from in-depth research into this issue.
Investment is a very important subject that needs to be understood, not because of examination purposes, but also because it endows one with life skills that would be very beneficial in ones future decision making. This paper has been able to bring to light, the different methods of investing which include speculation and true investments in the securities markets. An in depth analysis of both technical and fundamental analysis methods of securities has also been done. Its however possible to link the whole paper by highlighting the relationships between the above strategies as shown below;
In the first place, the paper explored the differences between speculation and investment and one of the differences was the information available, it was agreed that investors require more information that is objective and would assist in decision making. Likewise, investors would be benefit more from fundamental analysis since more objective information is analyzed, while speculators would easily go about their purchases using the short term oriented technical analysis. Whatever method one utilizes, it’s imperative that the goal of ensuring that the maximum benefit is conceived must always prevail
Dalton, J (2008) How the Stock Market Works, New York Institute of Finance, New York
Thomas W. A.(2009) The Securities Market, Philip Alan, New York.
Bogle, J.C (2012) The clash Culture: Investments Vs Speculation. Wiley and sons
Steinbach M(2008) Remarks on speculation and investment. Cornell University