The Motley Fool

Are You an Investor or Speculator?

There is a stark difference between “investors” and “speculators”.

Investors do their due diligence on the company and intend to hold the stock for a reasonably extended period. Speculators, on the other hand, trade the stocks based on hearsay or recent news, hoping that the share price increases so that they can make a quick buck. They do very little research and prefer listening to “friendly advice” or “hot tips”. Knowing which one you fall under is crucial to your long-term success in the stock market.

Unfortunately, many people who delve into the stock market might believe they are “investing” when they are, in fact, “speculating”. Having this misconception will inevitably lead to losses in the stock market. However, how do we identify if we are “speculators” or “investors”?

How much research have you done?

The key difference between speculators and investors is that investors put effort into their research. They dig deep into the financial results of the company, scour through annual reports and assess the company’s future potential. They understand the market the company operates in, have a clear view of where the company is heading and know the risks that the company faces in its business.

Speculators, on the other hand, do not bother about all these. They rely on tips from brokers, party gossip or merely copy what their friends have bought. They do not do their due diligence on the company and may not have an idea of what the company’s future potential looks like. They simply hope for the price to increase in the future so that they can sell their stake for a quick profit.

A good outcome is not indicative of either investing or speculating

Good outcomes in the stock market might propagate more of the same way of thinking. Just last week, an acquaintance told me how he had made 3% on an investment within a month. It was difficult to convince him that the good outcome of his trade was based on speculation, rather than strong fundamental investing.

Just because you have made some money in a trade does not mean that your method of investing works. It could be that you got a lucky break.

What is your purpose of investing?

Warren Buffett defined speculators as much more focused on the “price action of the stock”. If you are constantly monitoring your share price, hoping for a quick buck, then you might fall into this category of “speculators”.

Speculators are more focused on making quick money than they are about investing in fundamentally strong, growing companies for the future.

On the flip side, “investors” do not really care if the price of their stock moves up the day after they bought it. The purchase stocks at a price they feel are reasonable and are more focused on the fundamentals of the company. Investors will, therefore, be more than happy to hold the company they invest in for the long-term.

The Foolish bottom line

Speculation is not all bad. It is essential for the smooth running of the stock market as it creates liquidity and price corrections. However, being a speculator may be very bad for your pockets. Speculating is akin to gambling in the stock markets. The unpredictable nature of stocks in the short-term makes speculation a zero-sum game that is skewed against you.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.