We all have been familiar with the term Investments, but at some point, you might have heard about Speculation too. There are some differences and it is necessary to distinguish between investment and speculation.
Generally, investment involves less risk than speculation. Likewise, investment is associated with relatively longer time horizon (one year or more), while speculation is for short period of time (from few days to months). Another distinction involves the amount of information available to the individual and the time s/he spends analyzing investment alternatives. In speculation, the individual usually makes a decision based on limited information and analysis.
Here are the few differences between investment and speculation.
Use of funds
Use own funds
Consider fundamental factors
Use own or/and borrowed funds
Consider market rumor, inside information, and market behavior etc.
Example: A person buy a share of a company, he’s willing to keep the share for a long time and keep collecting bonuses, dividends and finally sell after much profits, then it’s investment.
Whereas, if a person buys the shares of a company, and out of inside information / rumors / announcements of the company on cash dividend, or merger with another company, or launching a new product, etc. there’s a possibility of certain or drastic rise in the price of shares. He is more likely to buy & sell it sooner. This purchase of shares is motivated by greed and fast return. It’s called Speculation. Generally, short term trading, intraday trading, real estate trading are the examples of Speculation.