specular vs. invest
Speculating and investing are very common words when it comes to investing money. Private investors, in particular, have a hard time differentiating the two terms at first. At first glance, speculation cannot be immediately distinguished from an investment and that is why one needs to take a look at each trade respectively.
1.- What does it mean to speculate?
Stock market speculation consists ofopen and close trades on the stock market for a short period of time. In essence, speculation seeksbuy low and sell high, earning a capital gain between the purchase price and the sale price.
2.- What does it mean to invest?
Every investment implies aspeculationto a greater or lesser degree, since we are betting that the price of the sharelong-termis higher than the price at which we bought the share. Investing in the stock market consists of carrying out an exhaustive analysis of those companies that offer the greatest growth potential to obtain a certain profitability, buying at a cheap enough price.
3.- Difference between speculation and investment
Time of possession
The first and most important differentiator between an investment and a speculation is the time of possession of the financial asset, that is, the period between the purchase and sale of the financial asset. It talks aboutspeculation when the period between buying and selling is relatively short while investments, on the other hand, tend to be long-term oriented.
Let's see this difference with the following example. Suppose Tesla publishes its quarterly results on day X and we are going to assume that its results are going to be better than what is generally expected. If I buy Tesla's stock before X-day hoping it will go up the next day, I am betting on a short-term rise in the stock. In this case we are talking about classic speculation. If I invest long term in Tesla because I am convinced that the company will continue to be innovative in the long term, it will sell more cars and its profits will increase, then we are talking about an investment. That particular quarter doesn't play a big role because I have a much longer time horizon.
Information sources
Another differentiating criterion between an investment and a speculation are the sources of information used.
Benjamin Graham, Warren Buffett's professor, is one of the staunch defenders of long-term investing. In his book "The smart investor”, from which we have copied the link below in the description, differentiates an investment from a speculation in the following way: “An investment operation is one that, after an exhaustive analysis, promises security for the principal and an adequate return. Operations that do not meet these requirements are speculative.
In speculation, the operation is based on the evaluation of the price movement to detect buying and selling patterns.. A Daytrader, who is considered the typical speculator, makes his decisions based mainly on prices and the indicators derived from them. For example, the daytrader analyzes the evolution of the price of a commodity and if it trades below or above the average line of the last 200 days.
an investorhoweverbases its decisions on the so-called fundamental analysis of a company, in which a macroeconomic analysis, a sectoral analysis, an analysis of the company as well as an analysis of the intrinsic value versus current value of the company are carried out. During the fundamental analysis, the investor examines the business model of the company, its existing competitive advantages, its innovations, the quality of managers, the competition in the market as well as important financial indicators such as the debt ratio, return on resources own or the status of orders. Order status is a good indicator of whether the company is capable of generating revenue and profit in the future. Two of the most important and easiest metrics to calculate are the Earnings per Share (EPS) and the PER which comes from the English Price to Earning Ratio. These two metrics are closely linked to each other. The EPS is nothing more than the profit in euros, which has given each of theActionsthat year and is calculated by dividing the company's total profit by the number of shares it owns. On the other hand, the PER measures the relationship between the price and the earnings per share and tells us how many times the earnings per share are reflected in the company's price. The PER is calculated by dividing the share price by the EPS.
Many people believe that only investors are useful for the economy. On the one hand, this is true since investors contribute capital to companies so that they can finance their investments and growth and thus offer greater utility to society. On the other hand, speculators also have their raison d'être, since they ensure high liquidity in the capital market, which makes it much easier for investors to buy and sell.
4.- Advantages of speculating vs. invest
Speculation has three fundamental advantages over long-term investment.
Short-term results
The first of these two advantages is that since the time horizon is much shorter than in long-term investment, the results are also obtained in the short term. If you dedicate yourself professionally to day trading, you will carry out several operations within the same day, which means that you would have your results on the same day. If you are also a profitable daytrader, you will be able to generate a salary thanks to the results obtained every day. This is something that you will not get with the investment, where we can have a great heritage, but over the years.
speculate down
The second advantage of speculating is the option to invest both up and down. That means we can make money "betting" that stocks will go up, or "betting" that stocks will go down.
This is mainly done through highly speculative financial products, such as CFDs and only suitable for experienced investors. Although it is true that in long-term investment these products can also be used to invest downward, the reality is that it is practically never used.
Estate Taxation
In some European countries such as Spain, Switzerland, Belgium and Norway as well as in certain South American countries such as Argentina, Colombia and Uruguay there is a wealth tax. This tax is different in each country and is usually applied to assets greater than a certain amount. Financial assets are part of the patrimony and therefore are taxed by this tax. This is a small advantage over long-term investment since in speculation assets are not usually held for long periods of time, in fact the most common is to close operations on the same day.
5.- Disadvantages of speculating vs. invest
commissions
One of the main disadvantages of speculation, if you practice it frequently, are the commissions. For each purchase and sale operation you carry out, you will have to pay a commission to tu broker. In the case of day trading, this implies a significant cost, since a large number of operations can be carried out throughout the day. That is why it is important to choose a good broker, which will ensure you competitive commissions, which do not hinder your results due to this operating cost.
Capital gains tax
Long-term investment has the advantage of being able to pay capital gains taxes deferred, that is, at the time you sell the shares or assets.investment funds. Thanks to this, until we carry out the sale operation we can maintain our positions in shares for years without paying a single euro in taxes.
In speculation, the financial asset is usually bought and sold in a very short period of time, which means that you cannot pay taxes deferred, since taxes must be calculated with each sale of assets.
dividends
Another downside to stock speculation is that it only focuses on one of two ways you can make money from stocks. We have already explained the two ways to earn money with shares before in this article. Speculation is mainly focused on obtaining a benefit from the increase in the share price, ignoring thedividends. Long-term investment therefore benefits from both increases in share value and dividends paid out by companies.
invested time
Although it is true that with speculation you can obtain practically immediate results, to achieve them you must dedicate several hours a day to monitoring the price in order to carry out winning operations. On the other hand, long-term investment requires several years to make the investment profitable, you can have your shares parked and simply review them a couple of times a year.
The time that must be devoted to the income statement should not be ignored in the event that you speculate frequently or the money that you pay to your financial advisor in the event that he keeps track of your accounts.
6.- What makes the most sense for private investors?
Long-term investment is best suited for private investors. Speculation should be left to daytraders, who have made this activity their profession.
If you want to make money with Daytrading, you should know that it is not a fast way to make money. It takes a lot of discipline and a lot of hard work at first. In addition, daytraders compete in the same markets as the big investment banks, which employ legions of experienced traders and the best technological equipment.
If what you want is to increase your wealth and become a fortune, it makes more sense to invest for the long term.Within the long-term investment there are two modalities. The first is calledactive investmentand it's about thatyou yourself analyze and choose individually the actions and financial values. It is not always easy, looking for financial assets and investing actively, carrying out fundamental analysis of companies, takes a long time. The second modality is calledpassive investmentand it's aboutdelegate the management of your investments to an investment fund manager or to a fund managerETFs.To increase your wealth, and especially at the beginning, it makes more sense to focus on investing passively.. This is the most recommended for beginners because that way you do not have to invest so much time and you can dedicate it to gradually familiarize yourself with the subject of Investment.
Right now that we mention time, it is important to mention the concept of "Return on Time Invested". If you achieve, with a relatively small capital, annual profits of €1,000, but for this you have had to invest 2 hours a day in analyzing companies, then your hourly wage will be below €1.50 an hour. With a minijob of €450 a month, you would have earned more money. For this reason, it makes more sense to start investing passively and educate yourself in the world of investments. Concentrate especially at the beginning on increasing your capital. Later, if you already have considerable capital and want to try investing actively, there is nothing against speculating on the Stock Market with the part of the capital that is left over after deducting expenses and monthly savings. Acquire your own experience!