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These are the differences between a speculator and an investor.

If you’re betting on the rise and fall of securities, you may be a speculator, not an investor. Investors and speculators both put money into assets, enterprises and instruments in the hope of generating a profit. Beyond that, however, they are quite different. Here are the main characteristics distinguishing investors and speculators, and why it’s important to recognize them.

Risk Tolerance

Risk is the one trait that most commonly divides investors and speculators. Generally, speculators are willing to take on more risk than investors.

Speculators tend to put money into assets with volatile prices. They hope to profit significantly by buying on the downswing and selling on the upswing. Their acceptable risk level is high.

Investors, on the other hand, tend to put money into assets promising stable, modest appreciation with limited downside risk. They exchange a chance of higher return for lower likelihood of loss. Investors usually prefer at most a moderate level of risk.

Timetable

These are the differences between a speculator and an investor.

Speculators and investors also differ in how long they hold onto assets. Speculators often plan to hold for short periods of a year or less. In the case of active traders, these periods may be a day or even an hour.

Investors, by contrast, are in for much longer holding periods. Buy-and-hold is typically their preferred strategy.

Some investors may never sell assets such as dividend-paying stocks. An investor who purchases land could wait decades before the investment pays off.

Speculators generally look to profit from short-term price fluctuations. Investors usually expect profits from gradual price appreciation or the piling up of interest or dividends.

Decision Making

Investors from speculators use different criteria to make decisions. Speculators may issue a buy order on the basis of a hunch, rumor, gossip or opinions about market psychology.

That’s unlike investors, who tend to spend time and energy learning as much as possible about their assets. Stock investors, for example, generally rely on fundamental analysis of a company’s business, sales, profits and markets, while ignoring rumors and hunches.

Vehicles

Certain assets, instruments and vehicles are more closely associated with investing than speculating. For instance, investors tend to put money into mutual funds, blue-chip stocks and investment-grade bonds.

Few speculators would be caught dead buying an index mutual fund. Rather, they might employ put and call options, futures contracts and short sales.

Admittedly, investors may use options, futures and short sales for hedging. Speculators, however, tend to rely largely or wholly on quick returns from risky vehicles.

Speculator vs. Gambler

Speculating is often described as nothing more than gambling. However, this is not always an apt comparison.

For one thing, some gambling may involve lower risk than some speculations. Take a sports bettor with inside information about a star player’s injury. They might be able to wager against a team with less risk than a speculator who sells an uncovered call option based on a hunch.

At the same time, speculators may base their actions at least in part on factual knowledge of the situation. Compare this to someone who purchases a lottery ticket.

All lottery gamblers know is that the odds are against them. There is no reason to think one ticket is more likely to win than another. In this case, a speculator could be more like an investor than a gambler.

Why It Matters

These are the differences between a speculator and an investor.

Investors and speculators lie along a spectrum.:There’s no sharp line dividing them.

Some investors behave like speculators, and vice versa. For instance, purchasing put options can usefully hedge a portfolio that otherwise relies on a low-risk, buy-and-hold investor strategy.

Either speculating or investing can lead to profit. What’s important is that an individual investor know which style is more comfortable and to primarily stick to it.

Bottom Line

Investors and speculators operate with different objectives, timelines and attitudes toward risk. They often use dissimilar reasons for selecting certain assets and instruments to receive their money.

As with any strategy, switching is associated with poor outcomes. A speculator who buys a stock on a hunch planning to sell as soon as the price rises should stick with that decision. If the price declines and they hold that stock in hopes of a rebound, that’s a switch to investing. The same is true of an investor who buys shares of a blue chip company, only to bail out like a speculator when the price slumps unexpectedly.

No matter where on the spectrum an individual falls, it’s possible to profit. Understanding the difference between the two and picking one as the centerpiece of a strategy can help to maintain a coherent, consistent, successful approach.

Investing Tips

  • If you aren’t sure whether speculating or investing is the right strategy for you, consider speaking to a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • For those who favor an investor’s approach, there are still a number of variables to consider. If you haven’t assessed your risk tolerance or determined how much you need to invest to meet your goals, SmartAsset’s investing guide can help.
  • Speculators can be found in just about any asset class, but they’re particularly prevalent in cryptocurrency. If you aren’t sure how or where to engage in that highly volatile market, SmartAsset’s cryptocurrency summary may be a good starting point.

Photo credit: ©iStock.com/Nikada, ©iStock.com/g-stockstudio, ©iStock.com/Aksenovko

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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