Monday, June 4th, 2012
It is very tempting when you have a small amount of money to invest to try and turn it into a much bigger amount by taking a chance on risky investments. With luck on your side, and careful research, it is possible to double your money, but only by accepting the possibility that an alternative outcome may be a significant loss. Seeking extraordinary returns on money invested through accepting high levels of risk is speculation.
Speculators rely on sudden changes in financial markets caused by such factors as changes in economic conditions, regulation, consumer tastes, technology etc to make windfall gains. In essence, speculators are gamblers. They work on the assumption that they can predict investment returns more accurately than other investors. Making money successfully from speculation usually requires extensive research, time spent monitoring the performance of investments and reviewing investment decisions, a strong, analytical approach to decision making that is devoid of emotions such as fear and greed, and the courage to either proceed or back away quickly when it is appropriate to do so.
An investor is someone who invests money in financial assets with the aim of making a profit. Speculators are investors, but not all investors are speculators. An investor who is not a speculator is someone who takes a medium to long term view of investment returns, being prepared along the way to accept short term changes in investment conditions. Investors adopt a more passive approach to investing. Whereas speculators are driven almost exclusively by return, investors find a balance between risk and return they feel comfortable with. A combination of speculating and investing can work well. Invest the bulk of your funds, and speculate with a small amount you can afford to lose, in the hope that you might just strike the jackpot!
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