Introduction:
Investment is the process of buying an asset such as a stock, bond, mutual fund, real estate, etc. and holding it for a specific time. The main idea is that if that asset is bought and not expended now, it generates regular income in the future or increases in the value over its lifetime or does both.
Simply put, an investment can be described as putting your money that is intended for future use in buying an asset so that we can benefit from the rise in its value in the future. It’s best to invest your money that is not borrowed.
Regular investments in India:
In India, people are crazy about buying gold; it is the best reference for explaining to you what is an investment. Nevertheless, gold and plot (land) do not generate regular income as some of the dividend-paying stocks and bonds do. Such investments only rise in their monetary value in the future.
You can buy a residential house or commercial building and rent it out, as this kind of investment pays you a regular income in the form of rents and also capital appreciation in its value as the real estate prices tend to soar in the future. It is also the most common investment strategy followed by Indians other than purchasing gold.
Investment is different from savings, which we shall discuss in the future. Well, our focus is on differentiating between investment and speculation in buying and selling of securities like stocks and bonds.
Investment in securities:
Investment involves buying of shares or bonds issued by well-established companies with good fundamentals such as strong capital structure, balance sheets, profitability, and earnings. It includes holding the securities for the long term, typically, more than one year.
The investment is made after a thorough analysis and calculation of risk associated with the purchase. It is very important to consult a certified financial analyst or adviser if you wish to invest an appreciable amount, say, exceeding 10% of your net worth.
A sound investment made in a good company not only benefits the investor but also proves fruitful for that company as well as the economy.
There is always a risk associated with any asset you purchase. A well-planned investment after fundamental analysis with a good exit strategy can reap immense benefits to the investor.
Let’s see a classical example of a good investment in stocks. If a person buys 100 shares of Company XYZ for ₹100 each, it means a total investment of ₹10000. After a year, the share price has increased to ₹125; the company has also paid a dividend of ₹5 for that year. So if the person sells the share now, he/she will get the return of ₹30 per share. The total gain will be ₹3000, which is equal to 30% of his/her total investment in one year.
Speculation:
Speculation does not have a specific definition, but it involves buying a liquid asset such as stock or bonds and selling it when the desired price is achieved. Typical speculation aims for higher returns with high risk and uncertainty compared to investment.
Derivatives such as futures and options come under speculation. These securities involve betting on a certain uprise or downfall of a stock/index that might happen in the future.
Generally, speculators give utmost importance to technical analysis like candlestick charts, trend lines, trade volumes, etc. for taking or exiting a position.
Intraday trading means buying and selling a share in a single day, sometimes, even within minutes after buying; it is a classic example of speculation. Nowadays, I do not participate in intraday trading.
Gambling is an extreme kind of speculation where participants only bet huge amounts of money only based on rumors spread purposefully on the social media like WhatsApp groups and Telegram channels by fake gurus and operators.
Conclusion:
Nowadays, stock markets are mostly run on expectations and speculations rather than underlying fundamentals. How can anyone explain the unbelievable upsurge that took place in stock markets on 13/03/2020 after a crash of 10% forcing the exchanges to halt the trading for 45 minutes? I wonder what might have happened within those 45 minutes that caused the markets to surge 15% afterward.
According to the reports, almost 95% of all investors lose money in the stock markets. I have witnessed the stories of people who lost all their wealth. If you do not know the difference between investing, speculating, and gambling, it’s better to stay out of stock markets.
Disclaimer:
I provide the information and my views on the website only to educate new investors, stock market enthusiasts, and the common public on equity or stock market investments. Please consult your financial adviser before making any investments in the stock market. In case of any queries, you can contact me via email ID or Contact Form.
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