Every market participants in the stock market, especially beginners, must understand the difference between investing, saving and speculating.
You might have already heard of investing, saving and speculating, but, do you know the difference between them. In this article, we will tell you what is investing, saving and speculating, and how they differ from each other.
If you are a regular reader of our blog, then you might have read our article on the difference between investing and saving. Many people think that both are the same, but it’s not. If you haven’t read it yet, then you can go through it after reading this article.
Now, let us understand the difference between investing, saving and speculating.
What is Saving?
Saving means you are setting aside your hard earned money for short term use or to safeguard yourself from any kind of financial emergencies.
In other words, saving means you are accumulating funds for a future use by taking very low risk. You might get a small percentage as interest but it wont give you much appreciation or income for future.
In general people keep their savings in;
- Bank saving account
- Fixed deposits
- Post office saving plans
Saving in these accounts typically pay very low interest. Due to which money kept will have slow growth compared to stocks and bonds.
After getting enough money in saving accounts for short term use, you can plan to build your investment portfolio, in which you can include stocks, bonds, mutual funds and real estate based on your risk tolerance.
Accumulating money in a saving account won’t protect you from the impact of inflation. Which is why financial experts suggest investing money after creating an emergency fund.
When you put your hard earned money into securities, land, building, real-estate or any other tangible assets in order to get future appreciation, income or both, it means you are investing.
The main objective of investments is capital appreciation and/or to generate income to fulfill your mid-term and long term financial goals.
Popular investing options are;
- Common Stocks
- Real estate
- Mutual funds
High returns in stocks also bring in high risk into your investment portfolio. You need to formulate your investing strategy to minimize risks associated with your portfolio to maximize return.
What is Speculating and how its different from saving and investing
Some market participants do not have patience to see their money grow over the years. They speculate by placing their money in high risk stocks with the hope of earning higher return within a short timeframe.
Speculating means you are gambling. Without knowing anything certain market participants try to make quick profit from short-term stock price movements. If you do that, it means you are speculating.
Speculation can be defined as a financial transaction in which you take substantial risk of losing all value, but with the expectation of a significant gain.
An investor is concerned with the fundamental value of the underlying assets. For instance, if the underlying stock is valued less than its intrinsic value, then they buy it for long-term.
However, a speculator is not interested in the fundamentals of the company, they are only concerned about the price movement. Therefore, in speculating, market participants attempt to make a relatively quick profit by monitoring the short term price movement of a particular investment.
When you try to guess the next big stock before finding any evidence of growth, you are not investing, you are speculating.
The best example of speculating is day trading based on tips and calls. In day trading, traders buy and sell stocks within hours or day with an expectation of getting higher return. Remember, speculators can win big, they can also lose big. The other best example of speculative assets is cryptocurrencies. These high volatile digital currencies such as bitcoin, ethereum do not have any underlying value and sound regulation to invest for long term.
The main difference between investing, saving and speculating is the amount of risk undertaken and purpose.