What is the difference between investing and speculating?

Investing, Asset Allocation
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July 2016
85% of people found this answer helpful

To me, the difference is largely one of time frame.  

Lets offer an example. We have 2 ten year olds with $100.  

Amy uses the $100 to buy lemons, sugar, an old table, and some poster board and sets up a lemonade stand on a busy road. Business is brisk, and she reinvests her profits by buying more supplies. By the end of the summer she has turned $100 into $500. Some days (rainy, cool days) business was slow, some days (the hot sunny ones) it was brisk. She was never discouraged. She did not throw up her hands on the first rainy day and say "no one is ever going to buy lemonade again - I'm going to sell my stand".  She is an investor. 

Johnny on the other hand goes and spends his entire $100 buying lemons, which he hopes to sell to Amy next week at a higher price. He heard the price of lemons will go up because the forecast is calling for record heat and lemonade is popular in the hot weather. Lo and behold, the forecast is wrong, the price of lemons drops, and Johnny is wiped out. Johnny is a speculator.  

Speculators are forever trying to be smarter than the market. Investors simply participate in the markets. Speculating is akin to gambling. Investing is like going to work.

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