Investing Tip:

Investing versus Speculation

I think sometimes we worry too much about semantics. But here is one situation where I think the difference between two similar words is important.

My Webster's New World Dictionary gives the following definitions:

  • Invest - To put money into business, stocks, bonds etc., for the purpose of obtaining a profit.

  • Speculate - To buy or sell stocks, land, etc., hoping to gain from price changes; also, to engage in any risky venture for possible huge profits.

People who wonder about the gyrations of the stock market, and who have wondered about why the Dow is up 300 points today, down 300 tomorrow, will find their answer in these definitions. On a relative basis there are more speculators and fewer investors than in the past. Speculators are by the definition above *hoping* to gain from price changes and are involved in risky ventures. Investors are purposeful and are not taking the same risk.

There is nothing good or bad about either group. But I think people who put money into stocks (or for that matter any risk investment) should understand which group they are in. People who put money into one stock that Uncle Fred recommended and lose their shirts should understand why. They are speculating, not investing. If they've only put a small percentage of their net worth into such a speculation, or they understand the consequences, then more power to them. It's when people confuse investing and speculation that problems happen. How many people think that the stock market is gambling? To some extent it is if you speculate, not nearly so much if you invest.

I think every investor should ask the question, "Am I investing, or am I speculating?". That way they can temper their expectations, and not blame the markets if things don't go their way.

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Donald Steinmann and Advanced Financial Management assume no responsibility for any actions taken due to comments made in The Investment Tip of The Week.

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"A good decision is based on knowledge and not on numbers."
-- Plato