What is investment speculation?

What is investment speculation?

This is a question I see on Google quite often.

And the easy answer to it is that investment speculation isn't 'a thing'. It's an oxymoron, a contradiction.

The reason?

If you're investing, then you're not speculating. If you're speculating, you're not investing.

You see, there are many reasons why investing differs from speculating

But, in short, investing is about making sound decisions based on thorough research and sound analysis about the future.

In contrast, speculating is guessing a stock, or another entity, will go up in price (or sometimes, even down). Speculating can be referred to as making "speculative investments".

Speculative investments have a really high degree of risk associated with them.

A speculator buys a financial instrument and guesses it will move in price, usually upwards. (S)he has no real intrinsic knowledge of the purchase and has usually done no analysis of the holistic environment. However, (s)he may have analysed charts to check previous price movements and patterns, known in the lingo as 'technical analysis'.

The speculator is mainly concerned with the price, and its potential movements, alone. They don't worry about annual income such as dividends or interest. It's the prize of a capital gain that drives them.

Speculating can be done on just about any financial instrument - stocks, currencies, commodity futures, art, antique guitars, snowglobes... you name it, people will try to guess what will happen to it!

There is another side to speculating of course. Sometimes, young companies need capital. Investors may shy away from entities that are too much of an unknown quantity. A speculator, however, may take that risk.

In this case, speculators are often organisations, like venture capitalists, or angel investors. They take the risk on a small unknown firm, but they usually demand big rewards in return because they could lose a lot of money. There has to be something in it for them.

An example of where a speculator made some money is Peter Thiel. He was the first investor in Facebook - a very big upside!

Another wider benefit to speculation, is liquidity. Speculators effectively pay to guess market movements of commodities such as gold or oil. The money they put into the markets keeps the cogs turning and the wheels of finance moving!

Some people say that a speculative investment is simply an investment with more risk. And it's definitely true that all investments contain a little speculative element in them. We don't know what the future will bring after all.

However, with investing, you'll likely not lose in the end, so long as you play by the rules and invest sensibly. Investors make money for themselves.

On the other hand, speculators make money for their brokers. For most people, it's the worst way to build your wealth, although it can be fun.

In conclusion, an investment is done after a thorough analysis of the available data. It is a calculated risk. Speculation - or investment speculation - is purely guesswork.

Rachael FitzGerald-Finch is a finance geek and blogger who inspires busy mums (and dads) to use economic thinking to master household decision making. Learn more at www.fitzonomics.co.uk