Speculate stock market

Speculate stock market

Posted: Art Dakapo Date of post: 30.06.2017

What is the difference between investing and speculation? At first, you think the answer is simple because the distinction is obvious — that is, until you actually put pen to paper and try to answer the question. Go ahead; take a few seconds and think about it.

After all, these terms have been a part of the financial lexicon since Joseph de la Vega wrote Confusion of Confusions in , the oldest book ever written on the stock exchange business. In his famous dialogues, de la Vega observed three classes of men. The merchants, the occasional speculators, were the second class.

Since the Dutch shipping firm Vereenigde Oost-Indische became the first company to trade its shares on the Amsterdam Stock Exchange, investors and speculators have coexisted in the marketplace. Over that year time period, the noteworthy have offered their own definitions of investing and speculation.

But none have stuck. Benjamin Graham, along with David Dodd, attempted a precise definition of investing and speculation in their seminal work Security Analysis Operations not meeting these requirements are speculative. Many of them deny that there is any useful or dependable difference between the concepts of investment and of speculation. We think this skepticism is unnecessary and harmful. It is injurious because it lends encouragement to the innate leaning of many people toward the excitement and hazards of stock-market speculation.

John Maynard Keynes, best known as one of the founders of modern macroeconomics and thought to be the most influential economist of the 20th century, was also a skilled buyer and seller of stocks, bonds, commodities, and currencies.

In addition to thinking about economics, he was intrigued with the stock market. It is the same point that is driven home 75 years later in The Clash of the Cultures: In his book, John Bogle argued that in the minds of most individuals, investment and speculation are now indistinguishable. All market activity lies on a time continuum. Moving from left to right, we observe buy—sell decisions in the stock market that occur in microseconds, minutes, hours, days, weeks, months, years, and decades.

speculate stock market

Although it is unclear exactly where the demarcation line is located, it is generally agreed that activity occurring on the left side of the time continuum is more likely to be speculation, whereas activity residing on the right side is thought to be investing. Here he parts company with the investor, to whom it is of little concern. Thinking long term or short term might be a sensible starting point that helps us distinguish between investing and speculation.

A time element is simply not sufficient. The distinction between investment and speculation is more complex than this. Let me be clear: This not a sneaky attempt to demonize speculation and declare that only investing is sacrosanct. Academic research clearly demonstrates that the market benefits from, and is optimized by, the participation of both investors and speculators. Although some investment purists might vote for opening the stock market just one day each year and on that day all buyers and sellers would transact business, the lack of daily liquidity would likely do more harm than good for the capital markets.

Furthermore, despite its negative connotation, it can be argued that some types of speculation are, in fact, socially redeeming. Carret shared the same opinion. Even Graham in The Intelligent Investor came to accept the necessity of speculation.

More than that, some speculation is necessary and unavoidable. Lacking clearly understood boundaries, individuals are wandering aimlessly back and forth between the worlds of investing and speculation. And herein lies the danger. The stock market is now dominated by a newly evolved species, the investulator — defined as an investor who unwittingly acquires speculative habits without realizing it. Although more study is needed, it is highly possible being an investulator is the reason why so many individuals perform badly in the stock market.

We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all its dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against. All posts are the opinion of the author. Robert Hagstrom, CFA, is chief investment strategist at Legg Mason Investment Counsel and author of the New York Times best-selling The Warren Buffett Way.

He is also the author of The Warren Buffet Portfolio: Mastering the Power of the Focus Investment Strategy ; The Essential Warren Buffett: Timeless Principles for the New Economy ; NASCAR Way: The Business That Drives the Sport , and The Detective and the Investor: Uncovering Investment Techniques from the Legendary Sleuths.

Hagstrom's new book is Investing: The Last Liberal Art second edition , which was published by Columbia Business School. To me, speculating has to do with the notion of buying something with the idea that you will trade it to someone else as soon as you can realize a favorable price , while investing would imply a willingness to own that something for an extended period of time without worrying much about the short run or temporary impairments of capital.

A speculator on the other hand seek returns from pure price appreciation. Also in my opinion, an investor sees the stock as a business, while a speculator sees the stock as a ticker symbol.

Future income from the asset is considered in the pricing. So that means speculators are also investors? Most people buy BRK shares in the hope that their value will appreciate. Does that mean buying shares in BRK is speculation? This works for me. A speculator has the same motivations as a house flipper while an investor is like the house buyer who intends to pay off his mortgage. As for me I spend more time speculating but make more money investing. If I can be forgiven I like to use a poker metaphor to describe the difference between investing and speculation.

For me investing is where you are dealt a good hand and slowly increase your stake as the hand improves, seeing how the other players react and how the cards are played, speculation is more a bluff, you are dealt a hand and you can take a guess at how good it may be but you cannot see any future cards, however, you bet large on the chance of a big win regardless of the uncertainty. A good poker player investor much like in the words of de la Vega, plays a mixture of the two, a mixture of risky bluffs and calculated less risky play.

This is perhaps the most important topic of out time. Many times, the value of the business diverges sharply from that of the market…witness the period dot com runup as an example.

speculate stock market

If you were the holder of a pension asset during the period, your interests will ill- served by money managers chasing an index so as not to underperform and lose clients. Another way of saying this is to look at vanguard- a firm which indexes for a living. The other comments had some great thoughts as well. Using time span to differentiate between investing and speculating does not capture the essence.

The difference is semantic. Investing contains a component of speculating, and speculating contains a component of investing. The main emphasis in investing is on the value of the assets underlying the investment with the expectation that it will create a desired return i.

On the other hand, the main emphasis in speculating is on the price fluctuations with the expectation that it will create a desired return i. Investing is the process of sacrificing the present value of a good be it cash, time or some other type of asset for it to multiply by the underlying growth of an ongoing or future opportunity be it a project, a stock or asset with solid economic fundamentals and approximately measurable risk obtained through thorough analysis and rational behavior.

Speculation is also the sacrifice of the present value of an asset to obtain a benefit from the growth or losses and loss is key of an ongoing or future opportunity. Speculation can or cannot be based on solid fundamentals, thorough analysis and rational behavior. Speculation can have out sized returns or losses due to the uncertain nature of the underlying opportunity, it seeks to exploit volatility.

Since short term volatility tends to be smoothed over time, speculation has a smaller time window. Games of chance are gambling; games of skill are speculating; and games of strategy are investing. The best way to understand this is to look at the definitions. Investors, like Warren Buffett, want to find the underlying value of a company.

He cares about the underlying demand of buyers and sellers in the stock. He is looking at the beauty-contest aspect: Focussing on the time frame or the intention takes attention away from a crucial and often forgotten part of the process: The need for someone to take you out of your transaction.

I think that if your plan involves eventually selling your asset to someone else, whether that is in 8 seconds or 30 years, then you are speculating, not investing. They operate on luck, confidence, and Hugo Boss. Those things disappear in that order, but usually they have feathered their nest, not by making a profit for themselves and their clients but by the sure and simple way of taking a commission.

The only way to invest is to invest in yourself and your immediate family. That way has been lost to most, due to the discount people place on future consequences.

One could go on and on, but I find it sufficient to say that no one knows what is going to happen in the future, and the farther one sttempts to speculate, the more chaotic are the predictions that any modelling used up to now have supplied.

The distinction becomes especially blurry when you consider a casino owner. It seems clear that owning a business like a casino is a long-term investment.

The fact that the odds are in his favor make it seem less speculative. But then how is he any different from the speculative computer with the odds in its own favor that makes thousands of trades per day?

Liquidity is the key, in my opinion, to distingusihing between investment and speculation — the source of the liquidity. If we are relying upon the contract and for example collecting the coupons and principal of a bond, the source of liquidity is the obligor under the contract.

If we are relying upon sale of the asset in a market, this is speculation. We are, after all, uncertain that the market may exist or that the price will prove satisfactory.

This also delivers a time dimension and shades of grey between these — in general the longer we hold an asset the more income is non-market. I have written a number of articles in the past year on this — happy to send them to anyone who would like to read them — drop me an email at: Investing is the relentless process of translating and refining tacit knowledge into a distinctive and unique investment framework or mental model that is scalable beyond one single person and adaptable in different relevant contextual situations, particularly in dealing with what we do not know.

Investors write with a framework as the north star to guide and navigate the marketplace jungle where dangerous animals, poisonous creatures and alluring sirens lurk at the corner. Speculators never bother to write. Investors care deeply about ideas and research.

Investors have an instinctive longing to weave outside our own skin some reflection of our mind. This article worthy for the students who are studying finance and for the people who are somehow connected to stock market. It gives a basic understanding of investing and speculation in a well defined manner. I think for the most part the difference is that investing consists of investing sum X for a reasonably well-known, predictable return Y: Speculation is purely price-driven, without expectation that cash or value will otherwise transfer to you from the investment.

So in that context, the vast majority of participants in the stock market, including most mutual fund and k participants, are purely speculators. A situation seemingly confusing or complex likely means you have it wrong.

Truth is usually pretty simple. But FINRA, and most of the financial services industries has is wrong. It is one of several semantic distinctions we have lost — including journalism vs propaganda in recent decades. As an equity buyer you do not own the retained earnings. You have the right to sell your security and you have any dividends or yield declared for shareholders.

The dividends are your return on your capital investment. No dividends, no investment. I have set this out in dozens of conversations over the past five years and written it in similar quantities of web postings.

I get that the industry does not want its retail customers to get this distinction. And many of those same customers do not want to think they are speculators, speculating on speculations.

In many, unfortunately were shocked at their security value declines. Few understand they were all in speculations. Robert, above, got it right about Buffett — he is a hypocrite investor, failing to provide anything more than a speculation to his capital suppliers. None have dared do it. The media is part of the cool-aid! What is not to like about buying more yield for less? In the real world who ever invests would invest by considering the possibilities of all risk factors and would form a strategy at least to safe guard the principle amount and to earn a better return i.

A part of investing, where the investors turns out to be speculators and try to dispose their investments very frequently irrespective of the situation demanded means regardless of the occurrence of the typical phases mentioned in the definition of Investing. Investments in an economy whose markets are informational and operationally efficient and with no country risk and no exchange risk would let people to be investors with not churning their investments, if not they are speculators.

I like the distinction between speculation and gambling. Gambling is when a person places a bet without knowing the odds of winning.

How to Speculate in Like a Successful Trader

Speculation is when a bet is placed only when the odds of winning are known. At the roulette wheel, I can perfectly calculate the odds of winning.

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Playing roulette is gambling; there is a percentage chance of winning and losing. Owning the casino is investment; over the long term, the house always wins and pays a dividend to its owners.

Speculation - Wikipedia

I dont try to make a theoretical distinction, because PERSONAL paradigms come to play, and debate will continuous, with no future end. Is like the psychological question: What is right or wrong? What is ok for you, I can perfectly find it wrong. But this does not happen in real life. So, lets come back to reality, and try to survive in the cannibal jungle of finance.

Regardless of how we are characterized, we commit our money into an asset e. An investor has more knowledge of the enterprise than the speculator. The investor has perhaps even made himself familiar with the products, finances, and stock behavior. The speculator , on the other hand, might only just know the stock symbol. The investor convinces himself by the the preponderance of positive information he as learned, or concluded, about the enterprise, that if that continues it can only benefit the value of his holdings in the enterprise.

The speculator could care less about the enterprise. He or she expects that some event, preferably in the near future, e. A speculator makes decisions on a story or theory; hoping for price appreciation depreciation. He is so convicted in his story that he often overlooks the risks. An investor is first and foremost concerned with risk or margin of safety.

He makes decisions after determining the intrinsic value of an asset, and never relies on a story or hope. If you were to buy a private company that has no daily marking of value, what would you focus on to determine its value?

Cash flow and free cash flow. Such a position could only be described as speculative. Robert, I met you at the Legg Mason Conference in Las Vegas back in or At the time I questioned you about your position in XM Satellite as I felt it was speculative, or at least over priced. After a couple rounds of questions from myself, you finally broke down and admitted that it was speculative, but there was room for a small speculative position in the portfolio.

Curious what you did with that position and how you made out? Speculation is a way of thinking. Some speculators trade financial instruments. I think we need three concepts: Speculation is the belief that price will change in the future, particularly of a commodity. Some speculations have positive carry, say if you can buy a building with a mortgage and let it out for more than the interest cost.

Others have negative carry, like when you buy a gold future which costs more than the spot price or when you play at a roulette table where a zero makes the odds unfavourable. A dividend on a share is another example of positive carry. A portfolio is a set of speculations with positive carry where you hope that diversification will even out the winning and losing speculations to leave you holding the carry.

Portfolio is only one type of investment, but the latter term has a wide application, meaning anything you build in the present for a future payoff. Your email address will not be published. Notify me of follow-up comments by email. Notify me of new posts by email. Toshiba said it has designated a consortium led by Bain Capital and several Japanese investors to be the preferred bidder for its memory-chip business.

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What is the difference between investing and speculating? | Investopedia

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About Us Authors Subscribe Contribute Conference Collections. By Robert Hagstrom, CFA. Robert Hagstrom, CFA Robert Hagstrom, CFA, is chief investment strategist at Legg Mason Investment Counsel and author of the New York Times best-selling The Warren Buffett Way. Sequestration nation Felix Salmon. Speculation Inside Investing High Return Investment. What Is the Difference between Investing and Speculation? Bamboo Innovator KB Kee says: Pseudo Random News and Comment Mortality Sucks.

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