There are many approaches to participating in the stock market, but they generally fall into two buckets.
Speculators try to outguess the market, play hunches and make big gambles in the hopes of a quick payday. Investors use careful analysis and focus on long-term results.
Investors rely on logic and speculators are plagued by fear. Here’s why investors are not afraid of the stock market but speculators are.
Speculators look to make short-term gains by identifying opportunities embedded in volatile or uncertain markets. They rely heavily on tips, rumors, and their own instincts to make investment decisions. To be fair, many investors also rely on analysis and historical trends, too.
Speculators typically hope to reap huge returns from price movements and rely less on investing in companies. Instead, they rely on making calculated short-term risks.
Often speculators trade on margins, meaning they take out a loan with a broker that can be leveraged to buy larger shares of companies. However, if the broker issues a margin call, then the loan needs to be repaid, which can result in significant losses.
This approach means that speculators are operating from a base of fear at any time. They fear their risks will pay off, fear what the market will do, and fear their bets will result in big gains or big losses.
That’s not to say that speculators cannot make big gains, especially if their timing is impeccable. But speculation is also the place where schemes, late-night television infomercials, and unscrupulous fraudsters can steer people down a dangerous, reckless investment path. Those double-digit gains one day can easily turn into double-digit losses the next.
Investors are more likely to use analysis of companies and industries than speculators when making investment decisions.
Investors Take Long-Term Approach
Investors take a more measured approach to the stock market. They rely heavily on fundamental analyses of companies they invest in.
Investors take the time to thoroughly research sectors and companies they are considering for equity investing. “The fundamentals” include a company’s relative financial strength, the track record of key management players, and the company’s position within a market. They look closely at quarterly earnings, management reports and conference calls, and industry reports before making or changing investments.
They take a long-term approach to investing, meaning they are not swayed by short-term losses or gains. Investors diversify their portfolios, putting their cash into equities, bonds, commodities and mutual funds. This approach helps mitigate the impact of losses in one asset class, industry or company, as opposed to the all-or-nothing approach many speculators take when it comes to returns. Investors hold on to stocks for years, if not decades, looking to maximize long-term gains.
Here’s another difference in investing vs speculating. When developing an investment strategy, investors assess their risk tolerance levels, their past experiences and investing goals. They can adjust this strategy over time to reflect changes in goals, life stage, and asset accumulation.
When it comes to investment vs speculation, think about time horizons. The speculator needs to make decisions in seconds, minutes, hours and days. The investor looks at years and decades. With a focus on embracing the market, investors understand that minor volatility is a small bump. While the speculator sees it as an opportunity that is little more than a gamble.