Some time ago I read an article on the Belgian investors’ website Beleggersgids about Speculating versus Investing. As a result I read the discussion on the website Investopedia what other people think about it. Let’s reflect on the difference between three types of investing : Speculating, Investing and Trading. According to me, all three types are investors that want to grow their money.
The 3 Types of Investing
Investing in the stock market and speculating is often used together as people don’t have the knowledge on how to invest in the stock market. This was in 2016 re-inforced by stupid Belgian politicians who invented the speculation tax.
Stock market investing, trading and speculating have 3 fundamental differences The 3 differences are:
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Timeframe : Investors such as Warren Buffett are buying shares in companies seeking income or equity growth. Profitable or growing companies attract investors. Investors seek income from financially stable or growing companies at low to moderate risk as they have done their financial review. Traders buy and sell positions in minutes, hours, days, weeks or months based on technical indicators. Traders buy positions long or short to grow their P&L quicker. Speculators hold their positions for weeks or months speculating that the stock price will rise to the stars. We have seen that investment strategy approach in the portfolio Risky Business of Bart Goemaere, remember? Here’s the link to this blogpost.
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Risk Management : Value investing is an income building approach that forms a solid conservative investing base. Low or moderate risk positions can produce steady returns. Trading on the other hand is buying shares that are rising in price or are expected to rise on news. Share price movement, not revenue or bottom line profit, attract traders. Traders accept more risk and price volatility as the trade-off is to seek considerably higher returns, compared to income investing. It can produce dramatically increased returns but at higher risk if you don’t know what you are doing. To do it well, trading takes solid technical trading skills than investing does. Trading strategies range from moderate to high risk dependent on how you apply it. Speculating is high risky business as you rely on knowledge, a new trend or hot sector,…there is no guarantee at all that your investment will rise in value.
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Level of knowledge : Fundamental investors say that managing positions in this basic conservative approach of value investing requires minimal time commitments. I would argue with that as you need to follow up financial results of your companies and execute portfolio management. This requires a knowledge to review balance sheets and future cashflows. Traders require a different set of skills. They require knowledge about technical patterns and the trade setup strategies that they apply. Speculation on the other hand is the shoot for the moon, home run seeking, swing for the fences, let’s say high risk – high reward approach. Well done speculation requires much knowledge, close attention and lots of time. So you see that different skills are required for each investing strategy.
Beside the basic differences already discussed above, there are many other approaches to the stock market. You know that we are also learning options investing. Within each approach there are many strategic variations. So be aware that with each investing strategy, there is a risk of money loss. Even keeping cash in your home has a risk of being stolen or burned in a fire, right?
My Investors’ Profile
When I was in my 20’s, I started with investing in the stock market. I worked for a high tech firm that went public on the stock market and employees were encouraged to buy shares at 14 euro. The stock dropped during several years to 2 euro….that is my first experience with investing or should I say speculating… I believed that it was a great company with great products but in reality this was not reflected in a rising stock price. Was the problem my (missing) level of knowledge, my holding period or my wrong investment strategy? We can debate about it. I learned at young age that every investment can lead to a loss of capital. I believed at that time that I was investing in the company I worked for. Now I think it was a speculative investment from my part.
My investing strategy is my dividend (growth) strategy. It is my first GO-TO strategy. There is also risk in this strategy but I consider it moderate. The focus is on cash flow, that steady income on my bank account. As I learn options investing, I consider myself growing as an investor with new trading or investing skills. Trading skills make me better as an investor as I can adapt my investing strategy as the market or underlying equity goes higher or lower.
Final conclusion
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