Over the years, the term ‘investment’ has become widely thrown about. It’s meaning has been co-opted to describe everything from putting your money into a hail Mary, high-risk cryptocurrency to a long term investment in real estate.
However, there’s a big difference between investing versus speculating.
Investments, in the truest sense of the term, are stable assets that have a strong likelihood to go up in value over time and which typically provide you with cash flow. If you are an investor, you must know how the asset is going to perform.
Meaning, how much money will it consistently kick off relative to how much time or energy it requires to own it?
In contrast, when you speculate, you primarily focus on what the price of the object is going to do independent of the asset performance. Speculating is fun and exciting, but rarely involves cash flow payments. Rather, it depends on the underlying asset that you own going up (or in some cases, down) in value.
What is Speculating?
Speculation is a high risk/high reward way of making money.
It usually involves buying an asset (e.g. product, company, stock) in the hopes of making a large profit from selling it when the market conditions are favorable. Speculators generally have knowledge of the markets and a good instinct for predicting which way they will turn. But, it is essentially a gamble.
For example, if the markets are currently going through a period of growth, then speculators can bet against the market and make a considerable amount of money on the downturn.
However, if the markets don’t fall far enough or fast enough, then they can lose a great deal of money.
Though generally not considered a good, long term investment strategy, speculators do put a lot of much-needed liquidity into the market. Most often, people get attracted to speculative investments because they are exciting, fun, and if they go the right direction, can create a “score.”
Obviously, the problem is that they can also fall in value, which loses you money and sets you back financially. Speculating also won’t help you with your monthly living expenses—that is, unless you get lucky and sell for something for a really hefty profit.
However, if you’re willing to put it all on the line, speculating can work out for some people.
For example, I have a good friend who got her start by buying a struggling business for about $65K and turning around. She made a tremendous amount of money when she re-listed it for sale three years later for a bit over seven figures. If you’re interested buying and selling businesses, you’ll likely want to get in touch with a business broker. You can ask for local recommendations or you reach out to a company like Hedgestone, you can check them out here.
Types of Speculative Investments
If you’re looking to invest in speculative investments, examples of these include:
● Buying a Single Stock: When you buy a single stock, you are speculating on the future value of that company. While most companies are likely to do well over long-periods of time, any single company could soar in value or plummet (think Lehman Brothers, Blockbuster, or Radio Shack, for example).
● Buying a Single Company: When you buy a single company, you are betting big that you can turn it around and sell for a profit in the future. However, it’s also possible that the value of the company purchased could fall to zero.
● Future Contracts: Future contracts involve the commitment to buy an asset at an agreed price at a certain point in the future. The buyer then agrees to buy the asset once the contract time expires. These types of contracts are usually involve trading commodities and are traded on the exchanges.
● Short Selling: With short selling, speculators predict that the price of a stock will drop in the future and take on an position to benefit from this belief.
● Put and Call Options: With a put option, the contract owner has the right to sell a security at an agreed price at a specific time. In contrast, a call option allows the contract owner to buy at a specified price at a specified time.
● Start-ups: 80 percent of start-ups fail. For every successful startup you read about, there are hundreds more that did not last. Due to this, investing in these companies is a much riskier proposition than buying shares in a more established company.
● Cryptocurrencies: Digital currencies such as Bitcoin, Ethereum, and Solana, experienced a huge surge in 2018, making some people a lot of money. Since then, some of these currencies have undergone huge price swings. Since most cryptocurrencies are relatively volatile, they are often considered to be a speculative asset.
However, as Bitcoin continues to mature and establish itself a new form of global money, it may need to be moved into the “investment category”. In particular, 11 Bitcoin ETFs were approved by the U.S. SEC in January 2024. This is likely to cause trillions of dollars to flow into Bitcoin, making it a more mainstream asset.
Being able to identify what type of speculative investment you’re looking at will help you better assess risks and opportunities.
Types of Traditional Investments
If you’re looking to invest in more stable investments, particularly ones that pay cash flow, then examples of this include:
● Rental Real Estate – With income-producing rental real estate, you receive monthly payments from your tenants. These rental payments should be higher than the cost of owning and maintaining the property, so that you make a net profit every month.
● Real Estate Investment Funds – With real estate investment funds, you receive monthly payments for investing in a fund that owns a portfolio of residential or commercial real estate properties. As an investor in the fund, you are paid either monthly or quarterly for your share of the cash flow profits.
Examples of this include Cardone Capital, Fundrise, DiversyFund, and Barnard Enterprises, among others.
● Corporate or Municipal Bonds – When you buy a bond, you lend money to a company or government. In exchange, the borrower agrees to pay you a fixed rate of interest, known as a bond dividend. These dividends allow you to generate income from your ownership of the bond(s).
● Dividend Paying Stocks – Certain types of stocks pay dividends to their shareholders. A dividend is a payment made by a corporation to its shareholders. These dividends allow you to generate income from owning stock positions.
Examples of dividend paying stocks include Iron Mountain Inc. (8.08% dividend), Alexander’s Inc. (5.87% dividend), National Health Investors Inc. (6.22%), and ONEOK Inc. (10.41% dividend), among many others.
● Dividend Paying ETFs – Exchange-traded funds (ETFs) are a type fund that owns assets (such as stocks, commodities, or futures), but has its ownership broken into “shares” that can be bought and sold on a stock exchange. Dividend paying ETFs pay out dividends from the assets they hold to their shareholders on a quarterly basis. On average, ETFs have lower fees than mutual funds because they have fewer operational expenses.
Examples include iShares Select Dividend ETF, Vanguard High Dividend Yield ETF, and ProShares S&P 500 Aristocrats, among others.
● Dividend Paying Mutual Funds – Dividend mutual funds are stock mutual funds that invest in companies that pay dividends. These dividends are then paid out to the owners of the mutual fund shares.
● Peer to Peer Lending – With peer-to-peer lending, you lend money to other people or businesses in exchange for receiving interest payments on your money. You act as a “bank” by providing a loan on which you are paid back your original amount plus interest by the borrower. This is another great way to receive monthly income payments.
Examples of peer-to-peer lending sites include Upstart, Prosper, Lending Club, and Funding Circle, among several others.
● Franchises – With franchises, the owner makes money each month as a result of profits produced by the franchise (business). The franchise owner gets to keep the difference between the cost of operating the business and the gross profit it creates. The median annual income of a franchise owner is estimated at $75,000 – $125,000, with 30% earning $150,000 or more per year.
While these aren’t the only forms of income-producing investments, they are the most popular and tend to be the most profitable.
Hopefully this lists helps to clarify for you the difference between investing vs. speculating.
Investing vs. Speculating?
To summarize, the key differences between investing versus speculating include:
- Speculation aims to make high returns in a short time-frame. Investment is a medium/long term approach designed to provide stable returns.
- Investments are low/medium risk. Speculating runs on a high risk/high reward strategy.
- Investors usually (although not always) use their own money. Speculators sometimes use borrowed capital.
- Investors require more research into potential investments. Speculators rely on market dynamics and their own ‘gut’ feel.
Which of these two investing approaches appeals more to you and why? Share your thoughts in comments below.
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*Disclaimer: This article is for educational purposes only and does not constitute financial advice. Before making any financial decisions, you should consult with professional adviser, such as a financial planner or CPA.