INVESTING VERSUS SPECULATING

When people think of speculative ventures, they generally form an unfavorable opinion. But these same people have a favorable opinion of investing. Nowadays, the line between investing and speculating isn’t so clear-cut. Speculation used to include investing in a company’s stock, whereas investing was reserved for putting money into high-grade bonds. However, now quality blue chip stock is considered an investment. Speculative ventures still exist; junk bonds can be an example.

Generally, though, speculation refers to the purchase of securities, or other assets, by people who hope that the assets’ value fluctuations will produce relatively large payoffs over a short period of time. A good example of this occurred in the late 1990s. When the dot.com companies began putting shares of their stock on the market, investors would gobble up as many as they could afford, hoping that the stock price would jump so quickly that they could make a tidy profit in very little time. While many of these investors did succeed in their quest, many became greedy and the highs became not high enough. These people did not profit; rather, they saw their investments plummet in value, sometimes to zero.

One of my clients likes to follow the stock market and invest in stocks outside his portfolio with me. He understands the risks, and takes them in stride. Recently, he decided that he would like to invest $50,000 in a dot.com company. At the time he purchased the stock, it was trading at 50¢ per share, so he purchased 100,000 shares. After a few weeks, the stock was down to 35¢ per share. His investment was down to $35,000 from $50,000. This company is now out of business, and my client has lost his entire investment.

This doesn’t mean that speculation is to be avoided at all costs. Smart investors know their risk tolerance and whether they can afford to play with their money this way. Using your son’s college money to buy shares of a dot.com is probably not a sound investment, but if you have some money you want to play with, and wouldn’t mind if you lost it, then being speculative isn’t a bad thing. It’s just not for everyone.