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Stocks: Investing or Speculating?

11 November 2009 2 Comments

Many people argue about whether or not putting money into stocks should be considered investing or speculating.  First, it doesn’t really matter, because it doesn’t change the outcome.  But, nevertheless, let’s offer an opinion.

First, let’s take a look at the definitions of both from the free online dictionary.

Invest: To commit (money or capital) in order to gain a financial return.

Speculate: To engage in the buying or selling of a commodity with an element of risk on the chance of profit.

Doesn’t seem like too much of a difference, no?  I’ve heard many people explain that stocks are not speculating because they have actual research and facts to use as their reasoning for buying or selling something.  The problem with that is that it assumes that a speculation is made blindly (like rolling a dice).  Most speculations are not blind speculations, but also involve research.  So, again, not much of a difference.

It’s my opinion that investing is a term like diversification, terms that make us feel better about what we’re doing.  Terms that are used by financial advisors to sound more sophisticated and complex.  Let’s be clear, whether you’re investing or speculating, you’re putting money at risk for a hopeful return.

Cash Flow

The only difference sometimes can come when considering cash flow.  If you’re goal in an investment is cash flow, I consider that closer to an investment than a speculation.  This can be dividend paying stocks, income producing real estate or a business.  This does not include non-dividend stocks (i.e. tech stocks) or trying to flip a house. These are in the speculation camp.

How To Invest Or Speculate On Stocks With Higher Success

  1. Be patient, and wait for good opportunities
  2. Don’t buy (or sell) because the masses are doing so
  3. Have a defined exit ahead of time – at what price will you sell your position?
  4. Execute on your pre-planned exit
  5. Keep emotions in check and stick to your well thought out strategy

I believe it takes years of speculating or investing to even begin to master these techniques.  This is why I strongly encourage starting in stocks at an early age even if it’s with a few hundred bucks.  I learn a ton every year and have been an active investor for about 5 years now.  This past year, I’ve learned a ton about technical analysis and about market momentum.  You will never stop learning if you become an avid player in the stock market.

2 Comments »

  • Austin said:

    I couldn't agree more about testing out investing. I put about $1000 into a zecco account over a year ago to buy a few stocks to see what it was really like. I was surprised at how much I learned about the ups and downs and the emotion of investing. It's much better to test this out as a 21 year old than waiting until you have 3 kids and a mortgage.

    Solid article.