The confrontation between investors and speculators on Wall Street has been going on for decades. A certain strategy and investment philosophy can arise very quickly., and disappear. Both sides have loyal followers. so, what is actually behind all this struggle? Seems, that the outer side of this confrontation is quite obvious, but what is really behind her. Let's look at some of the differences between investors and speculators and topics, what determines their deals.
Investors
Investor — is it any person, who buys a share with the intention of owning part of the business. Investors are trying to determine the value of a particular market asset and. if this value is satisfactory, then they will buy this asset at a given price. They try not to overpay, because it will reduce their potential profit.
Investors practice simple or complex fundamental analysis in the hope of finding a worthwhile investment for their capital. All their investments are focused on long-term pricing.. They tend to hold onto securities, even if the market turns against them. Investors stay in position, until fundamental factors have changed.
Investors tend to buy undervalued securities — shares of companies, who look healthy and ready to grow, but which are currently not very popular in the market. Investors sell or reduce their positions in shares, which they consider overrated. Many investors will buy stocks, that are not involved in the current market trend. The value of the asset is more important to them., and the current share price will be an important factor in determining, привлекательна ли данная stock для инвестиций.
Investors will hold the stock and build up their position during the market correction. They don't care about the company's earnings in a particular quarter.. Instead of this, they look at business and the economy in general, to determine, is their investment still worthwhile. Investors usually don't set any price targets. Instead of this, investors sell, when the company no longer looks financially attractive, as at the moment of investment in it. The choice of the time of entry into the market and price points is not so important for investors.
Investors don't use price chart analysis. Instead of this, they are interested in the company's income, present and future. They are interested in the state of the sector, in which the company is located. Investor's motto — buy a company, not a share. It means, what an investor should understand, how the company works and how it will continue to operate.
Investors rarely go short and. instead of this, prefer to look for the next undervalued company. As a result, investors hold cash or place money in bonds, when they cannot find any profitable buying opportunity in the market.
While this description of investors is mainly about the stock market, this in no way implies, that investors are not interested in other asset classes. Investors can and will place their capital on commodity, foreign exchange and any other markets, if it meets their evaluation criteria.
Specifications
- Investors seek to buy undervalued stocks and other market instruments.
- Increase current positions, even if the price goes down, if suppose, that fundamental factors have not changed.
- Can accept losses and hold positions in anticipation of future profits.
- Do not use any specific price target or timeframe, to close the position.
- Sure, that the appraisal approach is the most important criterion for investment (a change in rating is a signal to action).
Benefits
- Investment retention is calculated for the long term, so you don't have to worry about portfolio value every day.
- Fundamentally healthy companies are bought, which should rise in value over time.
- Objective criteria for evaluating investments are considered, what removes emotions from the trading process.
- Certain fundamental reasons await, to risk capital.
disadvantages
- Reading and understanding of balance sheets and macroeconomic fundamentals is essential, which may affect the price of assets, which is a complex and time-consuming process.
- The biggest obstacle for any investor — it is to make the correct determination of the value of the asset, but this is the key point for any investor action.
- If everyone were investors, markets would not make the same price movements, and would not have the same liquidity.
Speculators
Speculator — is it a professional or an amateur, who seeks to make a big profit by taking a certain risk. but, there is a very large gap between good and bad speculators. Speculators, when necessary, make quick decisions. They use any analysis tools. technical or fundamental, or a combination of both. to help you make trading decisions. Speculators take risk in the hope of big profits. Speculators are ready to buy shares, without going into the business of the respective company.
Speculators add liquidity and volatility to any market. They add liquidity, buying and selling more, than an investor. They add variability, because they use price targets and timeframes. Speculators cut their losses and move on. They have no interest in holding trading positions in the hope, what they, in the end, start to bring money.
Speculators trade short, so long way. They don't invest in business. Everything, what are they interested in — it is buying and selling shares or other marketable assets. They buy the same as new stocks, and large first-class companies. Speculators are ready to buy, even when the asset, as it seems, highly overvalued in the short term.
A good speculator, even before entering the market, knows, when he closes his trading positions, and what losses is he willing to take.
Specifications
- The speculator is ready to quickly exit the market, if he was wrong.
- Knows in advance, when will close the position — before that, how to make a deal.
- Ready to take small losses, to preserve trading capital.
- Trades long without hesitation, and in the short side.
- Uses technical or fundamental analysis when making his trading decisions.
Benefits
- Speculators add liquidity to the markets, what is essential for the survival of markets.
- Speculators buy and sell quickly, causing volatility in markets, which allows them to make quick profits.
- Speculators are willing to take risks, when they have the opportunity to make big profits.
- Speculators can take risks, buying shares of small companies in the hope, that they will be successful. On the other hand, very few investors are willing to invest in shares of new companies, because they do not have enough data for a comprehensive analysis. Wherein, it is the purchases of speculators that allow these companies to attract the interest of mutual funds and other investors.
disadvantages
- Speculators bring a certain imbalance to the markets, when they buy or sell at the same time. This leads to sudden trends in one direction or another., which may prevent investors from entering the market at an attractive price.
- Speculative buying or selling alone can drive the market. Speculators can often seriously push the price up or down..
- Unlimited speculation can lead to market bubbles, which subsequently burst. On the other hand, prudent investors try to avoid bubbles. Bubbles — this is the arena of speculators, players and those investors, who doesn't know, what is he doing.
Investor or speculator
Now, when we know, how these types of traders differ, we may wonder, how, for example, an investor can add elements of speculation to their trading? An even more important question — is it worth doing?
Not all investors seek to become speculators. For those. who is quite happy with the investor's position, there is no reason to become a speculator. That's why, my further recommendations are addressed to those. who wants to take a chance and try to speculate on the shares of companies, whose income is not so stable or whose balance does not allow making unambiguous conclusions.
Ways to add specs to your trading portfolio
- Avoid mixing speculative and investment positions. If possible, then open two separate trading accounts — for each type of trade.
- Never change the type of trade after, how it has already been concluded. Position open based on speculative profit, which did not go your way, cannot be transferred to an investment position. Such actions harm the goals of speculation and investment..
- Don't turn speculation into gambling, hoping for luck. Speculative trades are based on short-term criteria. You don't have to speculate just for the thrill.. Speculators take calculated risk, and do not let the situation get out of control.
- Make Sure, what can you afford to speculate. Depending on your experience, you must limit the amount of capital, which you allow yourself to speculate. You should not immediately add money to speculation after incurred losses. In other words, if you have lost a certain amount of money, you have to find out, why your speculations didn't work, before allocating extra money from your portfolio.
- Speculation should complement the investment portfolio. Keep speculation in your portfolio within those limits, which are comfortable for you. If you feel anxious, then should reduce the share of speculation in the portfolio.
- To become a good speculator, it takes a while. No one can be a good investor right away. See also, no one can immediately become a successful speculator. And there, and it takes patience and practice.
A source: Forex Magazine.
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