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The Important Difference Between Investing and Speculating in The Stock Market

10 minute read

David Ning

By David Ning

Sometimes, timing is everything.

It was 2016 when I first bought stock in VEREIT. They are a real estate investment trust that trades on the NASDAQ stock exchange. It was apparently going to be a turnaround story. I wanted to get in because the CEO, Glenn Rufrano, was known to be an expert in turning around battered companies. I thought he could help get the company going in the right direction and sell it to a bigger player in the real estate world. That potential acquisition was the catalyst I was anticipating. I foresaw big gains if it were to actually happen.

Patience Is Key

As luck would have it, the turnaround took much longer than I hoped. That offer to buy the company also didn’t materialize. I had faith, though. Weeks turned into months, and then months turned into years. I faithfully held my shares through interest rate scares that whipsawed the stock price. I even held through the pandemic crash, when the stock dipped from a split adjusted price of $50 to $20 a share.

I finally had enough back in April of 2021. I was sick of waiting for the acquisition that now appeared to never be happening. It had been five years! I finally sold my shares for roughly $36 each. I managed to make a little bit of money, but not nearly as much as I had originally hoped. The stock price had risen a bit since I bought it and I had collected some generous dividends over the years. Still, I could’ve made a lot more if I just bought the S&P 500 over the same period of time.

I’m An Expert In Timing

What happened next was a scene straight from the movies. A mere ten days after I sold my holdings, VEREIT announced that it was merging with Realty Income. Shareholders were going to receive quite a bit of Realty Income shares — which were worth way more. Are you kidding me?! If I were to just hang on for another week and a half, I would have made a 30% gain.

Missing out on the money was one thing. However, what made this announcement extra painful was that I held on for five years thinking the company would be sold. Then when I finally gave up on that dream, it happened almost immediately after! I don’t normally show too much emotion when it comes to stock investments (especially publicly), but I mean… COME ON! Right? I stuck with this stock for five years. How can my timing be that bad?

Timing Is Everything (When You Speculate)

Time for honest self-reflection. I was only speculating that there would be an event that would propel the stock price to the moon. It was never a guarantee and it didn’t pan out for me. I should’ve got out years ago, if I’m being honest with myself. For too long, I justified holding by convincing myself that it was more of an investment than a speculative trade. However, that was a mistake.

In a way, I was lucky that I made a little bit of money with this longer than usual trade. Most financial mistakes don’t usually increase your portfolio. Still, I should have reminded myself that there are speculative positions and there are investments. It can be easy to confuse the two sometimes, but they have important differences. I got caught trying to mix the two, and paid for it mentally and financially.

What Is Speculation?

All of this begs the question – what is speculation? Basically, speculation is when you are betting that a stock will go up (or down) because of a particular short-term catalyst. I was betting that VEREIT would be acquired quickly in 2016. It didn’t happen. I should have gotten out then. This is different from investing, which is having faith that a company will perform well and show growth over time.

You could also short a stock (bet that the price will go down) by speculating that something bad is about to happen. Lots of people were speculating that the stock market would crash right before the pandemic went global. The news trickling out of China in January and February 2020 had enough people concerned. Many of these speculators made out like bandits when they closed out their short positions at the end of March 2020, when everything collapsed. If they didn’t, they would have ended up taking crazy losses, since the market has done nothing but zoom upwards since.

Speculating Is Betting On Timing

As you can see, timing matters a great deal with speculative bets. You could be right, but still not make any money unless you time things perfectly. You have to get in and get out at the precisely correct time (and share prices). Just look at the recent GameStop situation to see a bunch of speculators who felt they could predict (and influence) the future $GME stock price. For those who timed it right, they made buckets of money. For those who timed it wrong, they are left holding the bag for those who already cashed out.

The masses speculate on stock prices all the time. In the majority of cases, they end up losing money. That’s why some people refer to “playing the stock market” as nothing more than a big casino. It’s no accident that I use the word “bet” to refer to some of my stock picks. Sure, I like to think I’m making educated an informed bets. For example, I wouldn’t have bet on VEREIT getting acquired if I didn’t know that the properties the company holds are paying rent and the financials of the company are attractive to a buyer. Still, a speculative trade is really just a gamble. As you can see, anything can happen when you gamble.

Trading Stocks OnlineShutterstock

People Lose a Lot Of Money Speculating

I was browsing around the Reddit financial forums the other day. Someone was genuinely asking for advice on his speculative position. He thought he was going to be rich when he invested in Dogecoin. The comedic cryptocurrency seemed like it was all the rage and was going “to the mooooon!” Unfortunately, this fellow badly mistimed his speculative bets. He risked his own life savings and also sank his girlfriend’s savings into the coin too.

He bought when the coin was worth 60 cents each. You could find plenty of online cheerleaders who were hoping the price was going to hit a dollar (or higher). Unfortunately, the price quickly dropped to 40 cents, losing his Redditor a third of his investment. Today, the coin is trading around 21 cents, meaning he has even less value (if he’s still holding, that is).

This guy wasn’t really asking for investment advice, though. He realizes that unless Doge makes an unlikely rebound, that money is already lost. He was really asking for advice on how to proceed with his life and his relationship after he breached the trust of his girlfriend. As you can see, losing out on irresponsible bets can have even bigger real-life consequences.

How To Speculate

This is just one story, but there are countless others. Plenty of people lose their life savings gambling with speculative trades because they think getting rich quick is simple and easy. Most people who speculate have no idea what they are doing. Before you make another speculative trade, there are three things you need to absolutely be clear about.

  • How much money you are going to put at risk?
  • How long you are going to keep the trade?
  • What is your exit plan — whether the event you are speculating on happens or not?

You may get lucky once or twice. However, failure to come up with a complete strategy ahead of time will cost you if you keep betting.

Investing Is Much Different

Fortunately, you don’t have to treat the equity markets like a casino. All you have to do is start thinking more like an investor and less like a speculator. An investor doesn’t look for any specific catalyst that can make short term price moves. They want to play the long game.

Stock prices are volatile. They mainly follows the laws of supply and demand, so anything can happen to prices in the short term. Even something as stupid as a soccer star removing a bottle of Coca-Cola from a press conference can cause massive short term swings. In the long run, though, stock prices reflect how well a company is doing. If they continue to increase sales, accumulate cash, and meet financial performance goals, the stock will inevitably rise in value. If you want to invest, try to identify companies that will continue to earn money over time. Those stocks will be worth more after a period of five, ten, or even 20 years. That’s real investing.

Invest In An Index Fund To Get Started

We often recommend a total market index fund for the average investor. I invest the majority of my funds in one of these. By investing in an index fund, you own the entire market. As long as the market as a whole is making more money over time, you will increase your wealth over time. I specifically invest in the Vanguard Total Stock Market Fund (VTI). It holds thousands of companies in the United States that try to make a profit. In other words, it’s not looking to make a quick buck on speculative day trades.

Sure, sometimes the VTI stock price drops like a rock. It’s never failed to recover though, so I have comfort knowing that the value of the fund should be perfectly fine in the long run. As long as American companies continue to innovate and improve their earnings over time, then my investments will keep making me more money before I retire.

You Can Still Invest In Individual Securities

Now don’t get me wrong. You can still be an investor and invest in individual stocks. One of my friends have been in Tesla stock for years. He first bought in years ago, when he realized that the future of driving was likely going to be electric. At the time, there was no other company that made electric cars quite like Tesla did.

Instead of speculating on a short-term catalyst, he was in it for the long haul. He believed that Tesla will sell more and more cars as the years passed — and that the stock price will ultimately go up as a result. He was right, as Tesla stock was only about $300 a year ago, reached heights of almost $900 in January, and trades at about $680 today. The company continues to grow and evolve, so my friend is holding his stock in anticipation of even more future gains.

Contrast my friend’s approach with someone who, for example, bought Tesla stock on the speculation that the new Biden administration would approve more tax credits for electric car companies and their buyers. That kind of news would probably give Tesla’s stock price a temporary bump. Then the speculator sells their position, pockets some profits, and moves on to the next gamble. Do you see how that’s different from actually investing?

You Can Speculate With Index Funds Too

Just because you buy an index fund doesn’t mean you are automatically investing and not speculating. Those who thought that the early coronavirus reports would turn into a pandemic could have easily shorted the Vanguard index fund. It definitely did drop (like everything else in March 2020), so they could have make a quick buck. Even today, people make speculative bets with index funds all the time.

Plenty of people make bets that the market will go one way or another before every Federal Reserve meeting. They primarily trade around index funds because of the size and liquidity these funds provide. Just don’t kid yourself into thinking that you’re really investing (instead of speculating) if you’re buying index funds for the short term.

Plenty Of People Make Money Speculating

As you can hopefully tell by now, speculating is much riskier than investing. Still, plenty of people make lots of money speculating. This is true, even if they have no idea what they are doing.

My friend just told me how his basketball buddy made $1 million dollars betting on the meme stock AMC. For those unaware, AMC is a chain of movie theaters that suffered greatly due to the pandemic closures. It was being heavily shorted by hedge fund, but retail investors from Reddit bought en masse to drive up the price. This guy believed in the idea and went all-in on AMC, throwing most of savings into the stock when it was $10. It’s now worth roughly $50. My friend keeps telling this guy to sell, since AMC is a highly volatile stock these days. The price goes up and down more than 20% some days. So far, he’s hanging on. Still, I hope he sells it soon, before the bubble bursts. He speculated at the right time and it paid off.

The same friend has another crazy story. Apparently, his cousin put a small amount of money into Coinbase (COIN) a few years ago, shortly after the 2017 Bitcoin price mania. Coinbase was some angel invested company back then, and wasn’t really well-known. He didn’t know much about the company other than that they are involved with Bitcoin. But he just bought a bunch on a pre-IPO website thinking, “Why not? It’s worth a shot.”

When Coinbase performed their IPO a few months ago, his share were worth $8 million dollars. $8 million big ones! You can get lucky gambling without any knowledge whatsoever. Just remember that it’s incredibly rare.

Stock market profitsShutterstock

How To Win By Blindly Speculating

These stories can make you jealous. However, for every lucky speculator, there are hundreds more who lose their shirts. You can make money if you know what you are doing. But you can lose far more in the long run if you don’t really have an idea of the markets work. When you speculate without strategy or genuine know-how, then speculating becomes pure gambling. Can you make money gambling? Sure, you can. People win lotteries or slot machine jackpots all the time. The odds are just stacked heavily against you.

This reminds me of a statement Danny Ocean made in the movie Ocean’s Eleven.

“The house always wins. Play long enough, you never change the stakes. The house takes you. Unless, when that perfect hand comes along, you bet and you bet big, then you take the house.”

Be careful gambling!

The Bottom Line

We want to get more people to invest, instead of merely speculating. It’s not that you can’t make money speculating. In fact, I know plenty of people who hit it huge speculating in the past few years. It’s just that investing is a much more dependable way to build wealth. It can be argued that getting rich slowly is actually a better way than getting rich quick.

It still stings a little when I went back to look up the price chart for VEREIT to write this article. Five years of holding on and missing out by 10 days isn’t something you forget easily. Then again, I just have to look at the price chart of my other investments to be reminded that the past few decades of investing have been really good to my wealth. I can’t complain.

David Ning

Experienced Finance Writer

David is a published author, entrepreneur and a proud dad. He firmly believes that anyone can build a solid financial foundation as long as they are willing to learn. He runs, where he discusses every day money issues to encourage the masses to think about their finances more often.


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