To have a good understanding of what investing is about, we first have to know what investing is NOT. When we talk about investing in the stock market, many would relate that to speculative actions, such as trading a stock for the short term or buying into a stock because it is “HOT” now.
Here are the key differences between what is true investing and what is speculation. It is important for you to know where is the line in order to position ourselves as successful investors in the future.
Invest With Logic
Investor: An investor will work through a possible investment with logic. He (She) would think through the reasons of what makes a stock a good investment. For example, he might invest in a company that has good growth potential in the future and was valued relatively cheaply by the market compared to his estimation.
Speculator: A speculator would not base his (her) decision on logical thinking. He might buy a stock just because it has fallen in price and he expects it to rebound in the future. There is no basis for why the stock might recover from its fall. Similarly, if he merely buys an oil and gas company because he feels that might strike an oil field in the future without any real evidence, it is a form of speculation. This is because there is no real logic reason on why the company is close to discovering an oil field and no analysis on how that oil field might be profitable for the company.
Invest With Risks In Mind
Investor: An investor would analyse an investment in term of risk and return. Apart of analysing what is the potential upside for an investment, he would also be mindful of what are the possible downside risk if he invests into the stock.
Speculator: A speculator might disregard the downside risk of an investment altogether. A speculator focused on “flipping a stock without much consideration on what will happen if something goes wrong”. For example, he might buy a stock trading at $0.10 per share and hope to sell it at $0.20 per share. However, there is no basis of why the stock should be trading at $0.20 per share and he does not take into consideration what happens if the stock fell to $0.00.