What is Investment and Speculation?

INVESTMENT AND SPECULATION :
“Speculation is an activity, quite contrary to its literal meaning, in which a person assumes
high risks, often without regard for the safety of his invested principal, to achieve large
capital gains.” The time span in which the gain is sought to be made is usually very short.
Investment involves putting money into an asset which is not necessarily marketable in
order to enjoy a series of returns.
The investor sacrifices some money today in anticipation of a financial return in future. He
indulges in a bit of speculation. There is an element of speculation involved in all investment
decisions. However, it does not mean that all investments are speculative by nature.
Genuine investments are carefully thought out decisions. On the other hand, speculative
investments are not carefully thought out decisions. They are based on tips, and rumours.
An investment can be distinguished from speculation in three ways – Risk, capital gain and
time period. Risk has a definite financial meaning. It is a possibility of incurring a loss in a
financial transaction. Investment involves limited risk while speculation is considered as an
investment of funds with high risk. The purchase of a security for earning a stable return
over a period of time is an investment whereas the primary motive to earn high profits
through price changes is termed as speculation. Thus, speculation involves buying a
security at low price and selling at a high price to make a capital gain. Investment involves
longer term allocation of funds whereas speculation involves .holding a security for a short
term and trading quickly for earning higher gain.
Speculation involves a higher level of risk and a more uncertain expectation of returns.
Investments are not risk-free but II the risk can be calculated. The expected return is
consistent with the risk of the investment. The truth is that any investment is a speculation
if the investor uses his judgement and forecast the probable course of events in order to
reap the returns on his investment.