Explanation of the characteristics of an investment and the difference between investment and speculation.
Differences between investment and speculation
1. Investment: Investment is made for the long term (i.e. two years or more) based on the idea that one is much more certain when one is trying to predict the cumulative results of many daily movements. Once invests with the knowledge that over the long run, the real investors will always make again.
2. Speculation: Speculation is usually for the short-run (i.e three months or less unless one is caught whence a speculator is then forced to become an investor), based on the idea that certain events may result in a rise in price.
3. Investment: Over a long period of time, true investment tends to produce a positive result. Based on many years of research in the US and Europe, Long Term Investment consistently produced a much higher return than the fixed deposit or the inflation rate.
4. Speculation: Since speculation is not based on anything concrete, its result is not at all predictable. Speculation can occasionally produce very high gains just as it can produce very high losses. Over a long period of time, speculation is most unlikely to produce a better return than true investment.
5. Investment: True investors can sleep soundly at night since they have a fairly good idea of the possible extent of their loss and gain beforehand. Besides, since they are investing for the long term, they can forget about short term movements and ignore the market most of the time.
6. Speculation: Speculation is likely to lead to many sleepless nights and anxious days since its result is so uncertain. The speculator will have to be always on the alert to take the necessary quick action to catch the right moment.
Characteristics of investments
The following are the main characteristics of investments:-
- Return: – All investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of deriving a return. The return may be received in the form of yield plus capital appreciation.
- Risk: – Risk is inherent in any investment. The risk may relate to the loss of capital, delay in repayment of capital, nonpayment of interest, or variability of returns. While some investments like government securities & bank deposits are almost riskless, others are riskier.
- Safety: – The safety of investment implies the certainty of the return of capital without loss of money or time. Safety is another feature that investors desire for their investments. Every investor expects to get back his capital on maturity without loss & without delay.
- Liquidity: – An investment, which is easily saleable, or marketable without loss of money & without loss of time is said to possess liquidity. Some investments like company deposits, bank deposits, P.O. deposits, NSC, NSS etc. are not marketable.
Know about Arbitrage Pricing theory & Principle of Arbitrage Theory