The Difference Between Investors and Speculators
In the Canadian stock market, there are two major players: the investor and the speculator. How do they differ and which has the right strategy?
The difference between the two, in its most basic form, is demonstrated best in the plain old, everyday dictionary. An investor is “one who puts money to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value. A speculator, on the other hand, is “a) someone who makes conjectures without knowing the facts and b) someone who risks losses for the possibility of considerable gains.”
Are you putting your money to use or putting it at risk? Speculators believe that by watching and playing, buying and selling, tweaking and trading, they will eventually predict the exchange that will make them a windfall. However, stock market history shows that this just isn’t so. Take the dot.com crash, for example. Speculators who thought they had hopped on board the next sure thing lost it all when the bottom fell out.
Time and again, we have seen that there is just no sure way to predict what will happen next. Despite the teachings of the “get rich quick” stock market gurus, the Canadian stock market remains a volatile and unpredictable beast. When you buy stock in a particular company, you are really buying part ownership. Yes, you will reap great rewards if the company excels. However, you also share in the massive losses should the company fail to perform.
The only proven strategy in stock market investment is to diversify your portfolio, and to then buy and hold. The goal of a wise investor is not to become rich overnight, but to minimize risk in order to ride the ups and downs of the market and come out ahead. By choosing stocks from a variety of companies in different industries, you are less likely to lose your shirt if a particular industry is hit with a financial crisis. Investors typically choose stocks carefully, based on their own research or the guidance of their financial advisor, with the intention of holding onto the stocks for a period of several months to years.
Younger investors are at a great advantage, as they have the time to sit on their investments and watch them grow. It can be tempting to check the status of your investments every day, fretting over when to unload a particular stock or jump on the next bandwagon. However, an investor will save themselves headaches and money spent on fees by simply holding onto their stocks and watching their portfolio as it grows as a whole, rather than speculating as to when they should buy, sell or trade based on gut feeling, emotion or the advice of another investor.
If you can afford to lose the money you plan to invest, you might decide to try speculating. If nothing else, it could be entertaining! However, a solid, rewarding stock market investment portfolio needs time, diversification and patience to grow.