Stock market speculation is the buying and selling of shares for the purpose of making a profit. It is based on exploiting probabilities, market inefficiencies and investor psychology.
Gambling vs. Speculation
Gamblers bet on a particular outcome that is determined purely by chance, such as a specific number at a roulette table. In stock trading, a gambler may buy a stock because he simply thinks, or “bets,” that it will go up based on nothing more than a gut feeling. A speculator seeks out situations with as many factors in his favor as possible.
Investing vs. Speculation
Investing is buying and holding an asset for the long haul with the expectation that it will appreciate in value. Speculation is seeking immediate profits by frequently buying and selling.
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Risk is making a decision without complete information. Gamblers take blind risks and may lose it all in a bad bet. Investor risk is holding an asset that may fail to perform to expectations. Speculator risk is somewhat similar to investor risk in that a trade may not pan out as expected, but it is much shorter in size and duration—i.e., if a stock moves against a speculator, he sells it immediately and cuts his loss.
- “How to Trade in Stocks”; Jesse Livermore; 2001
- gambling image by Albert Lozano from Fotolia.com