Quick summary: Investment vs Speculation

What we have understood till now is that investment is a function of a thorough analysis of security which promises safety of principal and satisfactory returns. We’ll discuss this definition in detail later. Before that, we'll see how to form principles for identifying investment and speculation securities.

Bonds Vs Common Stocks

Going with the notion that bonds are investment-worthy security because you can command with a high degree of certainty that the security will not deviate from the expected returns in the future whereas common stock is not investment security because you need to predict the general nature of the business and the expected return in the future which is nothing less than speculation is not correct. A poorly rated bond priced expensively might not be a good purchase for investment at the same time a stable company with strong fundamentals issuing common stocks can be regarded as an investment and not as a speculation issue. Understanding that just assigning a title to security doesn't define its characteristic is important fundamental learning to know.

Long vs Short Term holding & Outright vs Marginal purchase

Talking about the outright and marginal purchase it can be done for both bonds and common stocks. Outright purchase means that you pay the entire price for the security in a single transaction whereas a marginal purchase means that you purchase 10% of the security and take debt for the remaining 90%. For speculative security, one would try to purchase it on margin, as per the popular notion, but the fact remains even bonds can be purchased on margin. If security presents an opportunity to invest with a high degree of certainty on the return it can be regarded as an investment and it need not be an outright purchase. From the perspective of risk management, a risky investment should be purchased outright and safe investment as a marginal option.

We all know that the long-term holding of an asset is a risky proposition versus a short-term holding. The short-term holding that ways should have been a characteristic of the bonds versus common stocks.

Income vs Profit & Safety vs Risk

For investing in any security one needs to assess what is the objective of the investment. Some people need some steady source of cash flow while others would need a high appreciation of capital or principal value. Looking at securities from such a perspective we might eventually come to the agreement that common stocks can provide income as well as profit. The extent to which the income being generated can be reasonably assessed the common stock is an investment, but when we assume, due to a conducive business environment, the common stock would appreciate in value it becomes speculation since you need to profit from it but same can be said for bonds as well but the range of the price of bonds is limited and well within the range of assessment.?

Hope you enjoyed today's read. Cheers!