People often use speculation and investment interchangeably. But these two terms are totally different concept.
Read also: What is investment?
Speculation refers to the short-term commitment of fund to make highest profit. Its intention is only to earn more profit in short period of time. The person involve in the speculation is known as speculator. Like investor the speculator does not analyze the risk and return while purchasing the real or financial assets. The speculator only focuses on the return. While making investment, investor carefully done analysis of all the available information, markets, and industry where as speculator make decision only with limited information.
For example, one of your friend told you that the value of a bitcoin is $4600 and raising day by day and will reach to $10000 in few months. If you buy some bitcoin only with this limited information, then it is said to be speculation. Here your decision is based on the limited information provided by your friend which may or may not true. And other point is that you didn’t analyze the risk you just buy the bitcoin with the expectation of earning more profit in short time.
Key difference between Investment and Speculation
Investment refers to the commitment of fund for long period of time in the real or fixed assets for the expectation of receiving the higher income in the future especially for long time. Speculation, on the other hand, refers to the commitment of fund for the expectation of gaining higher profit in the short time.
Income and capital appreciation is the main objectives of the investment whereas the main objective of speculation is to earn more profit in short period of time.
While investing fund for long time period, risk and returns of the available alternatives are carefully analyzed by considering fundamentals factors. In speculation, speculator does not analyze the risk and return while investing fund. He makes decision by considering the rumor, inside information and market behavior.
There is moderate return in investment whereas there might be higher return in speculation.
Investment create lower risk for the investor because before making investment investor carefully analyzed all the available alternatives in terms of risk and returns. On the other hand, there is high risk in speculation due to the availability of limited information and non-analysis of risk and return.
Investment is done for long time period whereas speculator invests his fund for short time period (for few days or a week or a month).
Own fund is used in investment whereas own or borrowed fund is used by the speculator in speculation.