What is the difference between “speculation” and “investment” because regardless of the method, it is also a profitable investment of the business world? What factors can be identified?
Read full article to fully understand the meaning of both definition.
Table of Contents
What is speculation?
Is the behavior of 1 person, taking advantage of the opportunity of the market to go down to accumulate products and goods and profit after the market stabilizes. Mainly in the short term and profitable from price differences.
Speculation is (Behavior) buying and selling goods. Speculation is a dangerous behavior for society, not only causing damage to consumers due to price fluctuations but also stressing and unstable market operations, making it difficult to regulate the market of government.
However, the legal content as well as the way of handling this crime also has many changes with the change of socio-economic conditions, because changes in socio-economic conditions affect the level of danger. speculation to society.
What is investment?
Is the sacrifice of one’s own consumption in the present to expect to reap much greater benefits in the future. Investment needs analysis of the investment object and the expectation on the development of the investment object.
Investment usually takes place in a relatively long time, rarely happens in the short term.
See also: What is ROI? How to calculate ROI?
The difference between speculation and investment
Speculation is buying in very large quantity with the purpose of creating scarcity, pushing prices up many times higher than normal prices and then selling. Investing is buying and selling to make a difference by creating a surplus value.
Speculation takes place in the short term, benefiting from the price difference while investing in the long term, earning profits from the surplus value created.
Alternatively, you can distinguish the basic difference between investment and speculation in the following points:
- Investment refers to buying an asset in the hope of receiving a return for a long time in the future.
- Speculation is the act of conducting a risky financial transaction with the expectation of unusually high returns during a period of short-term volatility.
- In investment, decisions are made on the basis of fundamental analysis, i.e. firm / firm performance.
- In speculation, decisions are based on current rumors, technical charts and market sentiment.
- Investments are held for at least one year. Therefore, the duration of holding an investment is longer than speculating while the speculators only hold the asset for the short term.
- Investors expect returns from a change in the value of an asset.
- The speculators expect profit from the price change due to the current supply and demand forces.
- An investor expects a modest rate of return on the investment.
- A speculator expects higher returns from speculation but accepts it in exchange for the risks he faces.
- Investors often use their own funds for investment purposes.
- Speculators use borrowed capital for short-term speculation.
Seventh: In speculation there will be no stability of income like investment, but return is often uncertain and erratic.
- Investors’ sentiment is prudent.
- Speculators are often bold and risky.
3 principles of investment
Principle 1: Always invest with safe returns.
This concept is very important for investors to pay attention to because value investment brings real profits when the market inevitably raises the stock price to a reasonable level. It also provides protection in the event of a market downturn if things go wrong and the business situation is uncertain. The safe return of the company acquisition undervalued was the central point in Graham’s successful deals. Selected carefully, Graham found that it was rare to see further declines in these low-value stocks. When many of Graham’s students succeed with their own strategies, they all share the main point of view is “safe profit”.
Principle 2: Cope with uncertainty and profit from it.
Securities investment means dealing with uncertainty. Instead of running away when the market is tense, smart investors welcome the downtrend as a great investment opportunity. Graham illustrates this with a similar image to “Mr. Market,” the imaginary business partner of every investor. Everyday ‘Mr. Market” offers to investors either to buy or sell shares in business. Sometimes the market is overly excited by the business outlook and offering too high a price, sometimes frustrated by the future and offering too low a price.
Because the stock market has similar emotions, the lesson here is that you should not let the “Market” views mislead your own emotions, or, worse, guide your investment decisions. friend. Instead, you should shape your own value prognostic style on the basis of validating the facts. Furthermore, you should only buy when the offered price makes sense and sell when the price is right. On the other hand, the market is sometimes erratic, but instead of fearing uncertainty use it as an opportunity to get a good deal and sell when your stock gets a premium. real value.
Principle 3: Know what kind of investor you are.
Graham advises investors to know their own personal investment. To illustrate this, he clearly distinguishes the different groups of investors participating in the market. Active and passive groups. Graham mentions the concept of being active for investors and passive for investors who are defensive. You only have one of two options: either commit seriously with your time and energy to become a ranked investor, knowing how to balance the quantity and quality of the actual survey with the interest rate. expectations. If this is not your strength then be content to accept a lower and passive profit margin with very little time and effort. Graham changed the so far academic concept of “risk = profit”. For him, “effort = profit” is true. The more effort you put into investing, the more profit you will make.
According to him, not all stock players are investors. Graham believes that judgment critically determines who is a speculator or an investor. The difference is simple: an investor sees the stock as part of the business and the stock holder owns the business, while the speculator’s view sees it as a game. With expensive papers, no real value is concerned. For the speculator, value is only determined by the price paid by whoever paid for the asset. As Graham points out, speculating and investing are smart – as long as you are sure of what kind of good you are.