Investment or speculation? Sometimes the difference between the two terms is subtle, but other times there is an ocean between them. In this guide we will explain the difference between investment and speculation using rather simple terms, so that they can be understood by everyone, even by laymen.
Often the term investment is seen in a positive way, while speculation has a more negative meaning. However, we do not think this way.
Right from the start we anticipate that both terms have no negative connotations and there is nothing wrong with wanting to speculate on the price of a financial asset, unless you influence a market for basic necessities by artificially altering the price.
It does not have a negative meaning, especially if you use CFDs which, in fact, replicate the price trend of an asset without influencing it.
What is an investment?
A financial investment is an activity that an economic entity carries out with the aim of obtaining a profit. This profit does not necessarily have to be monetary, such as a capital gain due to the sale of financial assets, but also patrimonial, or in the acquisition of new assets that could produce future value.
There are short-term and long-term investments. However, when we talk about financial investments we often refer to the long term. In fact, in the short term we often talk about speculation, that we will see in the next paragraph.
The investment can also be for capital protection only, without the need for large profits. An example is deposit accounts, which offer a low but fairly guaranteed annual return.
The investor’s goal is therefore to invest money to get more money. In order to invest, it is therefore necessary to have initial capital. If at the end of the investment the final capital is greater than the initial capital, we can define the investment as successful.
Why does the word investment notoriously has a positive meaning? Because the investor has a longer investment horizon and prefers a generally low risk. Unlike the speculator, that we will see now.
What is a speculation?
Speculation has the same objective as investment, but in a very short time. The speculator intends to earn in the short term, sometimes even seconds if the scalping technique is adopted.
The speculator also risks a lot and is not interested in a low return. Those who speculate want a rather high economic return and, above all, they are more interested in a monetary gain.
Usually we have a negative meaning of the speculator because he is focused only on obtaining new money and in a very short time. Basically it adopts a more aggressive strategy on the financial markets.
The speculator evaluates when to enter the market and when to exit in great detail. By establishing in advance how much he is willing to lose (sometimes even his entire starting capital) and what his earning goal is.
Investment vs speculation
Let’s summarize now the main differences between investment and speculation with an exhaustive table.
|Time||Long term||Short term|
|Sought yield||Not necessarily high||High|
Generally speaking, these are the differences between investment and speculation, although in detail there are many differences that every trader will be able to know thanks to his experience.
For example, the speculator prefers derivative instruments, but also financial leverage, while the investor is interested in making his savings bear fruit over time.
Speculation with CFDs
If it is not the first time you visit Meteofinanza.com you will certainly know that we have dealt with CFDs several times, but if you do not know anything about them yet, please read our in-depth analysis here >>> CFD trading: what they are, advantages and strategies CFD trading
Speculating with CFDs is absolutely legal, in fact your entry into the market does not change the current price in any way. CFDs replicate the performance of a financial asset, speculation therefore takes place with a derivative instrument and you will not buy the underlying asset directly.
In fact, “buying” a share with CFDs does not mean becoming a shareholder of the listed company, but you will get a profit if the price goes up and a loss if it goes down.
If you are interested in speculating with CFDs on stocks and other financial assets, you might be interested in eToro, the leading social trading broker that has won the trust of 10 million traders around the world.
On eToro it is both possible to buy shares and speculate with CFDs on many assets such as Forex currencies, commodities, ETFs, cryptocurrencies, stocks and indices. Discover the potential of the eToro platform today and become a trader with your own strategy!