People invest their savings in securities to earn some money through interest and capital gains, but investments in financial markets are associated with many risks and the investor can lose his money very easily. Some people invest for earning interest and others are only interested in capital gains and price changes. In this article, we will find out what are the basic differences between investment and speculation in a detailed manner.
The word ‘Investment’ can be defined as an activity that commits funds in any physical assets or financial assets with an expectation of receiving returns in the future. The risk attached with the investment is called as ‘Investment Risk’.
Investors are the people who have savings after their expenditure. Investment may be of a lower risk or higher risk and usually investors want to get more returns at the same time they want to minimize the risk associated with the investment.
Investments are mainly of two types, they are Financial invetsments like investment in shares, debentures, insurance, etc and Economic Investments like investment in capital goods, plant and machinery, inventories, etc.
CHARACTERISTICS OF AN INVESTMENT
Investments have 4 basic characteristics, these characteristics decide whether the investment is good or bad, they are as follows.
The term ‘Speculation’ can be defined as an activity that commits funds in financial or physical assets with an expectation of earning a return in a short-period. The people who are interested in buying and selling of securities for earning money from price differentials are called as speculators.
Specualtors but securities in a hope to sell them at profit in the future, they dont retain the securities for a long-term, they only with-held the securities for a short period to earn money.
CHARACTERISTICS OF SPECULATION
There are some important characteristics that distinguish specualtion from investment, they are as follows:
1. Return Expectations : Profits from price changes
2. Duration of investment : short-term
3. Risk bearing capacity : high.
There are some important differences between Investment and Speculation, they are as follows.
INVESTMENTSPECULATIONInvestors are interested in safety of the investment.Speculators are interested in appreciation of capital and earnings profits quickly. INCOMEInvestors seek income from interest derived from the investment.Speculators seek income from profit from sale and purchase of securities. DURATIONInvestors hold the securities for a longer period of time.Speculators only hold the securities for a shorter term and tries to sell securities quickly. NATUREInvestors makes payment and takes delivery of securities on purchasing. Receives payment and delivers the securities on sales.Speculators neither delivers nor takes the delivery of securities on sale or purchase. RISK BEARINGThe risk bearing capacity of investors is low and limited.The risk bearing capacity of speculators is very high. CONCENTRATES ONInvestors concentrates on stable income from the investment.Speculators concentrates on earnings of profits which are highly uncertain. DEPENDS UPONThe earnings of investors depends upon the earnings of the enterprise.The profits earned by the speculators depends upon the fluctuations or changes in the market price of securities.
From the above discussion, it is clear that both investment and speculation involves the purchase of assets such as shares, securities with an expectation of return. However investment is different from speculation in terms of risk bearing capacity, return expectations and duration of trade, etc.