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Business is a complicated system with lots of strategies and options that can bring you to the top of “food chain”. One of the most important and valuable options are investments and speculating. Actually, many people don’t see a difference between them, which is a big problem for them if they want to understand the business and be successful. This text will help you see the difference and understand the essence of both these elements of business.
The essence of investment is to invest long-term capital in assets that are profitable. For example, you can invest in a business – either directly or through the purchase of shares. The main objective of the investor is to own part of the business and participate in the management of the enterprise. Different countries have their own subtleties of corporate law, but the general idea is this: the more shares you own, the stronger your managerial authority in this company. At the same time, the investor also counts on the growth of stock quotes in the long term and the receipt of dividends.
One of the most famous investors in the world is the “Omaha oracle” Warren Buffett. In his trade, he uses investment principles only. Very often, the purchase of large blocks of shares allows his fund to participate in the strategic management of companies. Buffett’s last major deal was a $5 billion investment in Bank of America.
Speculation is short-term investment in assets solely for the purpose of reselling them and making a profit from rising or falling prices.
dollar and plan to hold the securities until maturity, then you provide a loan to this organization and definitely make investments. If you buy shares of the same enterprise on the stock exchange for 1 million dollar, and after a week you sell them for 1.1 million dollar, then this is pure speculation.
Difference between speculating and investing
If you look at the situation deeper, then what is the difference between an investor and a speculator in the stock market? Both those and others make transactions on the purchase and sale of securities on the same exchanges, using the services of the same brokers. To find the answer, you need to look at a chart of an index over many years. Let’s say it’s an American DJIA with a century of history.
Looking at this graph, it can be seen that with long-term investment, capital is constantly increasing due to the growth of capitalization and the payment of dividends by corporations. Moreover, this growth is ahead of inflation. First of all, this is because the stock is behind real business, which inevitably has to develop in its entirety.
But if we showed this chart to a speculator, then he would start looking for periods on it where, in his opinion, one had to buy, and where to close a position or even “short” in order to earn on price fluctuations and get maximum profitability. Thus, theoretically, the profit, which the speculator expects, will be much higher than that of the investor with the motto “buy and hold.”