It has often been said that one man’s trash is another man’s treasure.
The same can be said for the idea of speculation versus investment or, in other words, buying for price versus buying for value.
You see, the speculator is buying on the hope of seeing an increase in the price of the stock. The speculator’s target price is usually calculated.
An investor buys a stock based on value.Â Such things as rising dividends and earnings, as well as an increase in assets or decrease in shares outstanding are things that the investor will evaluate before buying a stock.
It is important to note that stock prices fluctuate all the time…usually several times per hour!Â Value, on the other hand, is much slower to the table.
The speculator may have a very short time frame from which to make money.Â Some speculators trade stocks down to one minute or less.
The investor typically has a much longer time horizon and some investors will buy a stock with the intention of holding the stock forever.
The good news is that there is money to be made in the stock market using both strategies.Â The bad news is that there is money to be lost as well.
A lot of money can be lost when a person switches mid-stream from being a speculator to being an investor or vice versa.
A speculator buysÂ a stock, looking for a jump in price, and the good news comes along giving the stock the jump the speculator was looking for.Â However, instead of selling the stock and taking the planned profit, the speculator buys into the news and holds the stock, turning into a long-term investor.Â This may benefit the speculator in the long-term, but it is typically these “high risk” stocks that falter over the long term.
You can be a speculator with one stock and an investor with another, but be sure to stick with your original plan if you want to consistently make money in the stock market.