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Investing vs. speculation; what’s the difference?

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You may have seen the stories on the television or online of people who were able to generate outlandish returns in a short period of time through day trading or derivatives; but is this investing? Even though these traders are utilizing similar investment vehicles as retail investors, they are classified as speculators rather than investors.

Speculation involves taking on excess amounts of risk with the hopes of generating higher than average returns. The reality is, rather than investing these speculators are placing bets on how they anticipate the stock will move. Speculation is a form of “educated gambling”, where traders attempt to use the data available to them to predict drastic movement in a securities price point. These bets typically result in either a massive payout or decline in their account value, which is a result of them being extremely risky.

Investors, on the other hand, are much more sensitive to risk. Investors attempt to generate a return on their investment that takes in to consideration the goal they are planning for, the time frame until they need the funds, and how much risk they are willing to take. The goal with investing is to generate sustainable, long-term returns that make sense for the investor’s personal situation. Rather than putting all their eggs in one basket, investors diversify across several asset classes, investment vehicles, and geographical locations. The goal of investing is not to generate outlandish returns, but rather to earn a satisfactory return that can propel you closer to your goal each year.

Speculation is not a new concept, but the increase in technological capabilities have made speculation more accessible and mainstream. If you are considering trying to place some speculative bets, you should consider doing so in an account that’s separate from your main investment account, and with funds that you are comfortable losing. Before placing any speculative trades, ensure you understand and are comfortable with the risk you are taking on.

If you would like to further discuss the differences between speculation and investing, please reach out to your Jones & Roth Financial Professional.

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