Unlock Stock Market Wealth: How Investing, Trading, and Speculating Can Build Your Financial Success
These three big money makers can work for you as powerful wealth-building tools with investing, trading, and speculating strategies. In this lesson, you learn about the fundamental stock market strategies. Each approach, investing, trading, and speculating—whether used independently or in combination—offers unique opportunities for financial growth when executed with knowledge, skill, and timing. Understanding the critical differences between these strategies and when to apply them allows you to make informed decisions aligned with your financial goals. This guide to making these money makers work for you turns market opportunities into consistent stock market wins.
What You Learn From The Lesson: These Three Big Money Makers Can Work For You
The lesson discusses the 3 basic stock market strategies or approaches to making money work in stock markets. As well, you learn that each strategy requires different amounts of knowledge, skill, and time to produce the best money-making returns. And you learn that each strategy has considerably different risk levels and outcomes. That basic stock market knowledge helps you understand when and how to use these very different strategies.
FAQ About These Three Big Money Makers Can Work For You
How do the basic approaches to stock markets differ?
Used alone or in combination, investing, trading, and speculating are the three basic stock market strategies that can produce profits.
However, each approach requires different knowledge, skills, and time to get the best results.
For example, income investing takes less time and is easy to learn and do, while trading takes more time, experience, and knowledge for the best outcomes. As for speculating, the most consistent results come from those with proven trading records and extensive experience who put in the most time and effort.
Income investing thrives in all market conditions, trading flourishes in favorable markets, and speculation works best in strong bull markets.
What strategies should investors learn?
Investors should know about these five basic investment strategies:
1. Value investing: buys stocks trading under fundamental value.
2. Growth investing: buys company stocks with above-average growth.
3. Momentum investing: buy stocks rising in price and volume and sell those no longer growing or falling in price.
4. Dollar-cost averaging: regularly invests - weekly, monthly, quarterly, or yearly - to reduce the impact of volatility.
5. Income investing: buying dividend-paying stocks for an income stream.
However, investing in knowledge to create a wealth-building plan for your circumstances is the most valuable investment you can make. Learning to understand markets and investments will empower your investment decisions and success.
What are the different stock market strategies?
Stock market investors use numerous variations of the primary strategies, including income investing, growth stock trading, and speculation.
Imaginative humans and computer trading systems continually develop and test new ideas that add to the unlimited strategy choices. However, most successful investors use a close variation of one of those primary, reliable stock market strategies.
As a result, investors should understand the advantages and disadvantages of the three basic strategies before deciding what is the best fit for their investment plan.
Which stock market strategy works best?
The time frame is critical when deciding between investing, trading, or speculation. Although all can be lucrative, investing for income yields the most reliable and consistent returns in the long run.
Each method requires different skills, knowledge, and time commitments to achieve their best outcomes. Trading has performance advantages in strong bull markets, but markets are never always favorable.
Speculation can yield enormous gains, but it is the least reliable and carries significant risks and the potential for inevitable losses. As a result, speculators approach the situation with caution and a clear understanding of the associated risks.
All approaches have benefits, but in the long term, investing is the safest and most consistent method of wealth-building in all markets.
How does investing differ from trading?
Investing means buying high-quality assets that can appreciate and generate reliable dividend income for secure returns in all market conditions.
On the other hand, traders buy a stock at a low price and sell it at a higher price. Then, they must continuously find the next trading opportunity. If done well in favorable markets, they can earn significantly higher profits than investors.
However, trading risks include more volatile, unpredictable, challenging, and often less productive returns, especially in slow or declining markets.
What are the 3 principles of investing?
Successful investors understand the 3 Prime Investing Principles:
1. Risk and return management controls costs,
2. Smart Diversification lowers risk and increases opportunities,
3. Compounding is part of the value of thinking long-term.
They also know the 7 Essential Wealth Building Strategies:
1. Plan,
2. Save,
3. Invest,
4. Cost Control,
5. Loss Control,
6. Filter Noise,
7. Monitor and Review.
Thinking investors can grow rich by making money work for them!
What are the differences between an investor and a speculator?
Investors and speculators participate in financial markets using different objectives, time horizons, risk tolerance, and approaches.
Income investing is a long-term winner in all market conditions by using dividend income and equity growth to produce steady, modest gains that compound into substantial, unmatched results.
In contrast, speculators are the most aggressive, active traders. They accept higher risks while seeking high, fast returns and gamble that market conditions and their trading skills will allow them to outperform all others.
When speculations succeed, profits can be spectacular! But the downside can be a total loss! While income investing is reliable and easy to learn, mastering successful speculative trading is risky and challenging.
Planning Comes Before Strategy
Successful investing, trading, or speculation begins with a plan. The effectiveness of the plan and the stock market strategy depends on various factors. As a result, investors must first set their goals, risk tolerance, and time horizon. In addition, savvy investors will research and understand the market conditions. Then, strategy can fit the plan. That happens when investors select the best strategy fit for their circumstances. There are numerous strategies. Here are a few popular strategies with their potential benefits and drawbacks:
Buy and Hold
Benefits: Long-term growth, less time-intensive, benefits from compound interest.
Drawbacks: The 'Buy and Hold' strategy requires significant patience and discipline, and there is potential for significant short-term losses. However, long-term growth potential is substantial for those who can weather the short-term fluctuations.
Index Fund Investing
Benefits: Offers an easy, low fee, broad market exposure, and historically reliable return strategy.
Drawbacks: It is not for active traders or market followers because it lacks flexibility and potential underperformance compared to actively managed funds in strong bull markets.
Dividend Investing
Benefits: Provides regular income, potential for capital appreciation, generally lower volatility.
Drawbacks: It can be less growth-oriented, and selecting high-quality dividend-paying stocks requires some knowledge and skill.
Value Investing
Benefits: Potential for high returns by buying undervalued stocks, focuses on fundamental analysis.
Drawbacks: Identifying genuinely undervalued stocks is challenging. As a result, the best value investors are knowledgeable, experienced, and patient. However, it can take a long time to realize gains.
Growth Investing
Benefits: It focuses on companies growing faster than the market, with the potential to continue their high growth and yield significant returns.
Drawbacks: Higher risk often involves higher valuations and volatility. This bull market active trader strategy has performance challenges in other market conditions.
Momentum Investing
Benefits: Capitalizes on existing market trends and can yield quick returns for alert market traders.
Drawbacks: This trading strategy is high-risk, requires constant monitoring, and can lead to significant losses if trends reverse.
Index-Plus Layered Portfolio Strategy
Benefits: It helps investors learn and grow. It combines the stability of an index fund base, builds with income investments, offers layered growth possibilities for higher returns, and a diversified approach.
Drawbacks: Starting is easy, but layers introduce complexity that requires learning to select and manage stocks.
Each strategy has its merits and is suitable for different investors. It's essential to assess your financial situation and goals before deciding which strategy to adopt. However, regardless of the strategy chosen, regular monitoring and staying informed about market trends are critical to its success. This active engagement can distinguish between a good and a great investment strategy.
Winners Diversify, Manage Risk, and Think Long-Term
The three fundamental investing principles, often called diversification, risk management, and long-term perspective, guide investors in making well-informed decisions to achieve their financial goals. Here's a detailed look at each principle:
1. Diversification
Definition: Diversification involves spreading investments across various asset classes, sectors, and geographies to reduce risk.
Key Points:
Risk Reduction: By diversifying, you minimize the impact of a poor-performing investment on your overall portfolio. Different assets often perform differently under various market conditions, so spreading your investments can help mitigate losses.
Types of Diversification: This can include diversifying within asset classes (e.g., different stocks within various sectors) and across asset classes (e.g., stocks, bonds, real estate).
Balanced Portfolio: A well-diversified portfolio is less volatile and provides more stable returns.
2. Risk Management
Definition: Risk management involves understanding, assessing, and mitigating the risks associated with investments to protect against significant losses.
Key Points:
Assess Risk Tolerance: Determine your risk tolerance based on your financial goals, time horizon, and comfort with market fluctuations. That will help you choose suitable investments.
Risk-Return Tradeoff: Understand the tradeoff between risk and return. Higher potential returns typically come with higher risk. Balance your portfolio to match your risk tolerance.
Asset Allocation: To manage risk effectively, allocate your investments among asset classes (e.g., equities, fixed income, cash). Rebalance periodically to maintain your desired risk level.
Hedging: Use strategies such as options or other derivatives to hedge against potential losses in your portfolio.
3. Long-Term Perspective
Definition: Investing with a long-term perspective means focusing on the potential for growth over an extended period rather than short-term market fluctuations.
Key Points:
Compounding Returns: Long-term investing allows you to benefit from compounding returns, where earnings on your investments generate additional earnings.
Market Volatility: Understand that short-term market fluctuations are normal. A long-term perspective helps you stay invested through market ups and downs, avoiding the pitfalls of trying to time the market.
Patience and Discipline: Successful long-term investing requires patience and discipline to stick to your investment strategy despite market noise and emotional reactions.
Goal-Oriented: Align your investments with your long-term financial goals, such as retirement or education funding, and adjust your strategy to stay on track.
Investing Fundamentals Consequences
Following fundamental principles such as diversification, risk management, and maintaining a long-term perspective helps investors build strong, growth-oriented investment portfolios. These principles assist in managing the uncertainties and complexities of financial markets, leading to more stable and rewarding investment outcomes.
Different time, risk and return
We look at the 3 basic stock market strategies, investing, trading, and speculating and discuss four ways they differ from one another:
First, we identify the strategic differences between each strategy.
Second, we examine the time needed to learn and use each strategy well.
Third, we identify and consider the risks of each strategy.
Fourth, we look at the huge difference in returns between each strategy.
Investing vs. trading vs. speculation overview
Stock market investors, traders, and speculators have three distinct roles in financial markets, each with its characteristics and objectives.
Investor
Investors typically take a long-term market perspective, buying stocks to hold for an extended period, often years or even decades.
They generate income and wealth with dividends as stock appreciation.
Investors research companies for financial health, management, competitive position, and prospects before investing.
They use fundamental analysis to assess the intrinsic values based on financial statements and economic factors.
Trader
Traders take a shorter-term approach to the market than investors, buying and selling stocks more frequently. They trade in and out in minutes or hours on the same day, within a few days, or may hold for weeks or months but seldom for a year.
Traders aim to profit from short-term price market movements rather than relying on long-term appreciation or dividends.
They use many different trading strategies and often technically analyze market data and price patterns to predict future price movements.
Some also apply quantitative analysis using mathematical models and algorithms to identify trading opportunities.
To magnify their returns, traders may borrow and leverage their potential returns, which also magnifies risks.
Speculator
Speculators are the most extreme traders seeking exceptional profits from short-term price movements of high-risk stocks. Speculative trading can seem closer to gambling than to the predictions of technical analysis or the facts of investing and market fundamentals.
Speculators take on higher levels of risk to pursue high returns and can engage in high-risk strategies like trading options, futures contracts, or highly volatile stocks.
Speculators don't focus on a company's underlying value but on market sentiment, momentum, or short-term price fluctuations.
When successful, speculative trades can be highly lucrative, but losses can be significant or total on bad trades.
While investors, traders, and speculators participate in the stock market, they differ in time horizon, risk tolerance, and strategy. Investors take a long-term approach; traders use many strategies focusing on short-term price movements, and speculators engage in the most aggressive and highest-risk trading activities.
Strategic differences
Investing, trading and speculating are the 3 basic stock market strategies that each need different knowledge, skills and time to use well. Each strategy has different risks and produces different results. And they each work best in different market conditions. But all 3 of these basic strategies can make money work for you and produce stock market profits.
Start by defining the basic differences between these strategies.
Stock market investing
Often identified as income investing or simply investing, this is the quiet, mature, and stable wealth-building strategy of the 3 basic stock market approaches. It is the slow and steady strategy used when we seek income by buying shares in large, established and stable dividend-paying companies. To meet the basic White Top Investor investment standard, any investment is restricted to companies that pay dividends. That means investors collect those dividends as their investing and income standard but also enjoy the typical equity growth as markets rise, which is a very nice bonus.
Superior investors build the foundation of their investing success on income investing. To do that they buy shares in profitable, growing dividend paying companies. Of those investors, the most conservative never consider buying the shares of any other type of company. Income investing is the core or foundation, White Top Investor strategy. It allows investors to enjoy a comfortable ride to wealth on the stock market highway. Like traveling at a safe speed on cruise control, the ride is not exciting but reliably makes steady progress.
Stable growing profitable dividends
Owning shares in stable and dependable profit-producing companies lets investors build a reliable and secure income-producing portfolio. There are advantages to restricting purchases to high-quality income paying companies. The best advantage for investors is a steady stream of returns in all market conditions with a low to moderate stock market risk.
Such an income-building approach can form a solid conservative investing base that produces steady and dependable returns. Another benefit is the dependable profits and steady growth of such companies is also reflected in their rising share prices. That means income investors enjoying a steady income stream, also see a steady increase in the value of their equity as a nice income investor bonus!
Financial services prefer clients that trade over investors
Financial service industry pros pay lip service to the investing or income portfolio approach. And there is a very good reason for this, they make less money from income investors! That happens because financial advisors earn a significant portion of their income from commissions on stock trades. As a result, traders or speculators pay them considerably more than income investors.
Long-term investors with relatively few trades therefore keep trading and commission costs at a minimum. Clearly, their financial advisors collect less fees and commissions as a result which certainly lessens their income and bonuses. Overall, advisors and their companies get the lowest returns from servicing income investor accounts.
Income investors are content to seek dividend-paying stocks as long-term holds that will pay them years of dependable income. The risk profile for quality investment-grade stocks ranges from low to medium risk. As a result, these investors enjoy the income stream while holding true to capital rule one – don’t lose money! Or pay it out in unnecessary fees or commission expenses!
Investors do homework!
Investing well to make money requires doing some homework to consistently produce the best results. Before making any investment, we must know, in advance, what we are getting into. We are only interested in a well-established business that have a record of making money and paying dividends. By paying dividends they meet a prime rule of income investing, every investment must pay us money! And to avoid missing that rule, we filter out any stocks that do not meet the basic criteria of paying dividends. That simple step quickly separates potential investments from all the others. Other White Top Investor lessons explore the details of the process by giving investments a deep first look.
Stocks of companies that do not make money can be a trade or speculation but simply do not qualify as prospective income investments. That basic fact of investing life helps income investors keep it simple and consistently profitable. By keeping it simple, no bottom line means no investment, ever! At the same time, for a trader or speculator, such stocks may be a fine trade or speculation. But investors always pass on such stocks as a potential investment. Following these simple rules eliminates a huge portion of the companies listed on stock markets and that helps keep income investing risks and costs low.
Trades or speculations are not investments
A note about misrepresented investments. Someone just learning about stock markets or investing can be confused by the vocabulary and jargon. Too often trades and speculations are offered to the uninformed as investments. In part, this is an issue of vocabulary. Media and financial service pros frequently refer to buying anything in the stock market as investing. For clarity, White Top Investor presents investing and investments as shares of profitable, growing, dividend-paying companies. That eliminates the majority of stock market listings as potential investments! But both media and financial service companies make no such distinction.
As a result, you can find many investing reports, opinions, and commentary referring to trading or speculation as investing or investments. Using the simple White Top Investor definition of 'investment' will help keep your income investing on track. Clearly, if there is no profit the company shares may be a trade or speculation possibility but are never considered an investment possibility. Investments must pay investors. To be sure, always check for yourself that the company both makes money and pays investors before you consider them as an investment.
This is not suggesting that all trades or speculations are bad. Both trades and speculations can be excellent money-making opportunities. But to make serious amounts of money at reasonable risk and cost, you need to do your homework. Of course, you could get lucky but never count on getting lucky as an dependable approach to making money from the stock market.
Stock market trading strategy
Trading the stock market is all about movement, noise, and action. No matter which basic stock market strategy you choose to use, each needs price movement in order to produce the most profit. For traders, the needed price movements can qualify any stock as meeting a trader's criteria rather than restrictions imposed by an investor. As well, speculators can be attracted to many trades as they seek profits.
On the other hand, any stock can be an investment if it is profitable, dividend-paying, or growing. However, trades are not restricted to these kinds of stocks. Traders can also be speculative shares that have price movement and some volume. As traders need only price movement, any stock can meet those narrow criteria.
Any stock that is moving can be played as a trade. In that sense, even investments (quality profitable, dividend-paying, growing companies) can be traded. However, trades are not restricted to profitable, dividend-paying, or growing companies. They can also be speculative shares that have price movement and some volume.
Experienced traders produce great returns!
Experienced traders produce good returns and the most skilled traders can produce excellent returns! Becoming a skilled trader requires knowledge and skill levels far beyond being a basic investor. Trading is not the place for new investors to learn about making money work in stock markets. First, become a knowledgeable investor. Then, if you want to trade, learn the needed skills and techniques to do it well. Traders accept more risk and volatility than investors; they ride trading stocks for short-term growth in equity values that often produces more profits than the income approach. When trading is going well in a bull market, gains can happen faster than any price rise income investors experience.
Rising share prices attract traders to buy when they expect prices to rise higher yet. They seek to profit by buying low, or at least lower, and selling high or at least somewhat higher prices. Traders profit from the rise in share prices, not from growing revenue or bottom-line profit.
When it works, a good trading strategy can produce excellent returns for traders. That share price movement has trade-offs: more risk and volatility than investors. On the positive side, they ride trading stocks for short-term growth in equity values that often produces more profits than the income approach. Those gains can happen faster than any reasonable dividend stream could ever produce!
Trading can deliver more profit, faster
Compared to income investing, trading can produce more profit, faster! Besides needing more time to learn how to trade well, trading profits come at higher risk, and with the need to sell before you can bring those profits home. Traders who do it well, spend far more time managing their portfolios than an investor has to. For the very best results, they also need a considerably higher level of knowledge about the markets, economy, and good sources of company information.
Trading can be very profitable and even exciting, and traders are the darlings of the financial industry and both business and mainstream financial media. Regular buying and selling produce great revenue for advisors and the industry. As well advisers and financial companies always take their commission cut whether trades are profitable or not!
Trading action attracts media attention
All the trading activity produces lots of stories, opinions, and noise to attract and keep media interest. That means trading activity and information gets far more media exposure than any other stock market strategy, activity, or information. Those volumes of exciting news reports give newcomers the impression that trading, traders, and trading reports represent the market. In truth, they are just part of it, but the part that continually gets most of the attention.
The time needed to trade well is far greater than the time needed to invest well. Traders have greater risks of loss and much higher possible losses. There are trading strategies that manage risk well but none with risks as low as investing.
Trader holding periods range from nanoseconds to months. Unlike investors that profit from income, traders must sell to realize a profit. Selling out to take profits means they must seek another trading opportunity before finding more profit. In contrast, investors enjoy a steady, stable income, but traders’ profits are much more irregular. In the stock market community, trading, buying, selling, and research employ more people than the other strategies and account for most stock market action, time, and attention.
Financial advisors love traders
Both the financial service industry and the media reports, recommendations, and opinions concentrate on the buying and selling action of traders. That action produces much more excitement, noise, news, and fees! But that racket can mislead investors, particularly new investors, into thinking stock market investing means trading. Advisors love traders because active buying and selling produce much more fee revenue for them.
While the industry and media coverage encourage trading as the way to stock market success. Well-managed investment accounts pay the smallest fees to advisers or managers. In contrast, traders pay several times as much. For long-term money and consistent performance, the clear money-making strategy winner is investing. As a long-term approach that consistently works, investing produces reliable results and lets us sleep well at night.
Be aware of high frequency trading
New for the 21st century is high frequency trading. This type of trading changed stock market investing, trading and speculating. To become an informed stock market investor, trader or speculator requires knowledge how high frequency trading impacts markets.
For in-depth coverage of this big topic see the White Top Investor course 510, High Frequency Trading Explained.
Stock market speculation strategy
Speculation, the final of the 3 basic stock market strategies are traders that accept higher to extreme risk while seeking to score the biggest possible profits! When they have a winning hit, these speculative traders become the newest stars of media and market attention. These speculators are the traders that turn pennies into dollars!
People that are attracted to making speculative trades with dreams of realizing such huge price gains are the stock market gamblers. However, like most rockers, singers, actors, or aspiring stars, the majority of speculative traders languish in obscurity. And often poverty. The speculation strategy has a very well-established history of far more failures than the other stock market strategy.
For speculative stock plays to work, timing and circumstances must be right. As a result, predicting speculation success is somewhat like picking the next hit song or the entertainment industry's next overnight discovery. For most stock market players, that means avoiding speculations keeps more of their money and sanity intact. But speculations cannot be totally rejected as a money-making stock market strategy. Done well, knowledgeable, skillful speculators are able to find very profitable trades.
Winning speculations can be very profitable!
Yes, winning speculations can be very profitable! Those inclined to speculate must have the time, resources, and inclination to accept higher risks to chase the promise or hope of higher profits. Speculators shoot for the moon seeking spectacular profits in this high-risk – high-reward approach to stock markets. This is the risky crowd that needs no highway! They explore business and economic frontiers hoping for spectacular success as fast as possible!
There is no such thing as low-risk speculating. In fact, most speculations are high to extreme risk. Speculators seek home runs, swing for the fences, and let it all hang out! This approach can produce spectacular upsides.
Losing speculations can produce huge losses
There is a very dark side to speculating because a speculative trade may possibly produce no return or real losses, including, at times, a total loss of capital! However, when done well, speculation can work well. To make that happen speculation requires much knowledge, time and also means paying very close attention to markets and the specific speculation. Every speculation is a very high-risk strategy. And, as with all trading, speculators also must sell to realize a profit.
While a few financial advisers specialize in speculating it is important to be aware that very few do it well over a period of years. Done well or poorly, every speculative transaction attracts adviser commissions. Advisers collect their cut when clients win, lose or draw. The client takes all the risks and the client's capital eats all losses and costs. Speculative trading is no place for the faint-hearted!
Time to learn, manage and deliver
Each of the 3 basic stock market strategies takes a different amount of time to learn, manage and deliver their best result. Therefore, an important first step is to take the time to learn the characteristics and differences between each strategy. Then, by knowing the time each strategy needs for research, managing, and riding a selected position, you will know which is the best strategy for your situation.
Managing time for each strategy varies from a few minutes a week to virtually full-time concentration during open market hours. Holding times for people using each approach vary between nanoseconds to many years.
And the time to manage each approach and the time needed for the best results also varies with each strategy and position. The next section looks at the time periods for our three basic approaches.
Investing - the time to build wealth!
Managing the income investing approach requires the least amount of time to learn and manage. Besides being fast and easy to learn, income investors can hold quality positions for years. All the while they continue to collect those nice dividend payments! So dependable, so boring, and an excellent way to build wealth! That is why income investing is the base or foundation wealth-building strategy recommended by White Top Investor.
Investors expect to hold each investment position for years. At a minimum that means 1 – 3 years but in good situations, many years longer. The ideal is to own the best dividend-paying companies for as many years as possible. When you own an excellent dividend-paying stock, there is little need for frequent buying or selling so this approach has very few transactions.
The low costs of a few transactions are one happy result of this investing approach! Low transaction costs keep more money in the pockets of investors or most importantly, in the market working to build your wealth. A portfolio of high-quality dividend-paying winners is a beautiful and productive financial creation.
Trading - time to score profits!
The most successful traders are very knowledgeable about stock markets, the sectors they trade, and the companies traded. Learning about and understanding the complexity of all those moving parts takes time and experience. But learning to trade through trial-and-error experience is a very expensive way to learn. The best way to learn such a complex topic is with the hands-on guidance of an experienced trader that has a record of success. Anyone seriously aspiring to become a consistently successful trader needs a trading mentor.
Traders buy and sell positions in seconds, days, weeks, or months. Very few traders hold a position for a year or more. At one time, very short-term or day-trading was spectacularly profitable. But the widespread use of computer-driven high frequency trading changed all that. Now, human day traders have little hope of generating the profits of a now bygone era.
As a result, the most successful human traders profit from holding positions for at least days but often stay in a position for a few weeks or even months. Traders buy positions anticipating a rising stock price but often wait until a stock price actually begins moving up before buying a full position. Such traders take that approach as a momentum play and sell once the upward price movement stops.
Good traders sell under-performers early
Portfolios of traders usually have some spectacular winners and more moderate gainers. But traders also have to deal with duds or the stocks that do not move up or move the wrong way. In those cases, better traders correct mistakes early by selling a losing or non-performing position as fast as possible. By doing that, these experienced traders stop any losses as fast as possible.
But traders have many costs that come with the frequent trading action. Those costs are something income investors do not have. Financial advisers love the traders because the action pays them well and often! In addition, trading can be very entertaining and exciting. But all the entertainment of this approach to the stock market certainly has the highest costs.
Speculating, time for the big win!
Most stock market speculators hold or stay in a position for weeks or months rather than trying to day trade or score a profit in just a few days. But this higher-risk approach means the speculator has to quickly shift expectations when circumstances change. That can mean holding positions for a very long or for a very short time. The best speculators are quick nimble thinkers.
When speculators hit a winner, they may have caught a ride on a stock market shooting star! The best speculations can move decimal points! However, on the downside, losers can be sinking ships that take all the capital to the bottom. When playing speculations, losses can be real, huge, and happen fast!
Speculation results vary over the widest possible range. Knowledgeable speculations, done well and in the right circumstances, can produce stunning returns. But, on average, most speculations produce tears. As a result, speculations as an approach to stock markets have the potential for the highest losses. And far too often bad trade execution puts speculations in the financial graveyard.
Risks range from low to extreme
Each strategy among the 3 basic stock market strategies has a different risk profile. To manage risk well begins with knowing the different risk levels for each strategy and what causes the changes in risk with each strategy. Understanding that risk is attempting to know or acknowledge the unknown and applying a degree of measurement to it. Each unknown can be favorable or unfavorable and each could matter a little, a lot, or possibly not at all!
The Myth of High Risk, High Reward
Anyone new to stock market investing soon learns not to fall for the high-risk, high reward tale. Accepting a higher risk does not necessarily mean you will receive a higher return. This is true despite the considerable amount of nonsense written by players in the financial service industry, financial media, and shameful so-called academic studies that directly relate risk to reward. That misinformation is misleading work that typically, or is it conveniently, overlooks downside assessment and management. Those are the real keys to risk control. Experienced investors know, if you can lose it all, the risk is high! But if the downside is limited or can be controlled, the risk can be moderate or even low.
How Superior Investors Manage Risk and Returns
Superior investors know there are ways to manage risks and bring home excellent returns. In part, experienced investors win by avoiding or accepting high risks. They take a pass on the many high-risk situations that offer little or no chance of producing any return. No matter what the numbers are, situations that are more likely to lose money have too much risk. Just avoid them to develop the positive record of a superior investor!
Assessing Risk: Start by Asking the Right Questions
In every investment situation, begin your examination of risk by first asking, what is the downside, how much could I lose? Getting that question answered will make you a better judge of risk and give you the ability to avoid the risk of accepting a loss.
Investing risks are low to moderate
Income investors’ strategies range from extreme avoidance of any risk to acceptance of moderate risk.
Trading risks are low to high
Trading risks have a very wide range of risk acceptance from low to fairly high, depending on the timing, market, and each specific trading decision.
Speculating risks are high to extreme
Speculators operate in a high to extreme risk trading environment. For speculators, one significant risk is, who will buy the position to allow the speculation to be converted to a profit? Without that buyer, speculative investments have zero value! In that situation, your risk of loss is 100%!
A simple check, speculation or con job?
When seeking an exciting speculative ride, we can tramp through the higher-risk parts of stock markets. But we must be aware many cons and questionable promoters lurk in this neighborhood. Often such promoters control the entire stock inventory as they manage their pump and dump schemes.
To check if your speculation bet is playing into a pump and dump con, you can check by making a quick unannounced sale. By not telling the promoter in advance, any quick sale tests if the market is real or entirely controlled by the promoter. Simply sell a little back without notice to the promoter or stock pusher. If that sale does not happen quickly, seamlessly, and profitably, or triggers a negative reaction from the promoter, it is time to go. Sell it all and get out all you can as soon as you can.
Returns range from none to high
Returns vary by both the time and choice of the 3 basic stock market strategies used. The best overall long-term result comes from investing because it is easy to put in place and manage. That makes it the go-to wealth-building strategy. Income investing can form the base of your best wealth-building plan.
Investing, trading and speculating are generalized strategies that all come with many variations and refinements. This examination has only looked at understanding the basic generalized differences. For wealth building, White Top Investor recommends building portfolios around an income investing base. Once the base gets established, some investors can choose to layer on a growth stock level to their portfolio. Adding this growth trading layer can accelerate their portfolio development. After both the investing and growth layers are producing results, risk-tolerant investors can add a speculative level to take advantage of such possibilities and opportunities.
Trading delivers short term performance
In the short term, under favorable conditions, when trading is booming or speculations are producing fabulous returns, income investing can seem like the slow lane of wealth building. However, over any long-term period, income investing outshines all other strategies when it comes to consistent wealth-building. Trading can produce the greatest results during short-term periods of large price movements, but long term, income investing consistently is the best wealth-producing strategy.
Great traders take years to develop
Although trading takes considerably more time to learn, manage and execute well, trading does produce very good results in good times. It just does not work well at all times or in all markets. That means trading returns show great variations over time, by market, sector, and individual stock.
Year in, year out trading returns can be good but over the long term never outperforms the steady performance of an investor’s income-producing portfolio. The fact of stock market life frustrates many traders convinced their superior knowledge and skill will allow them to grow faster.
They are like a sports car driver convinced superior driving skill and a powerful engine will beat all others. However, Grandma can put the family investing sedan on stock market cruise control and win this race, when it runs a few years. Even professional traders and hedge fund managers have taken this bet and all lost over the very long term.
Unmatched short-term speculation returns
When speculations are working, nothing comes close to their short-term performance. During the 1990s I parlayed a small stake into over a million dollars speculating on resource and technology plays. When they work, speculations can seem to multiply money. However, those times are unpredictable, limited, and do come to an end.
When conditions change, the sector that produced all the success typically goes dormant, often for years or even decades. For stocks based on materials harvested, dug or pumped from the earth, building or expanding production takes a long time. As a result, commodities including agricultural, mineral, or energy-related stocks can produce a pricing Super Cycle. Super Cycles last a long time, about three decades!
Rising prices increase production
When demand rises, prices rise to get producers to make more. That takes years for producers to plan, invest and increase production. Time after time, the expansion goes too far and increases production until too much product goes to market and prices fall. That keeps any growth in check for years until demand again exceeds production. Then the cycle repeats.
Speculations that are early to pick up on the expanding trend show huge price wins. Anything can be subject to speculation. The newest technology, cryptocurrency, and marijuana-related stocks are examples of speculations in vogue at the time this lesson is being written.
Lesson takeaways, These Three Big Money Makers Can Work For You
Money making from 3 basic stock market strategies include investing, trading, or speculating to make money work for you when used alone or in combination. All can produce money-making stock market wins for you. Each approach needs different knowledge, skills, and time to deliver the best result.
- Differences among 3 basic stock market strategies
- Investing buys and holds shares to focus on building income by holding shares in profitable, growing dividend-paying companies
- Trading requires buying low and selling shares higher to profit. Any moving stock, in a profit-making company or not, qualifies. To win, traders need price movement and selling to realize the gain. Then endlessly repeating the process to seek more profitable trades.
- Speculating requires buying very low and selling very high, seeking a big win. Like trading, speculators must endlessly profitably repeat their process to produce gains.
- Time to learn, manage and produce results
- Investing can be learned quickly, managed with ease, monitored in minutes a day, and consistently produce good results.
- Trading takes considerably more knowledge of markets, stocks, and trading behavior as well as time to learn it well. The best traders pay close attention to markets and their positions. They are engaged in markets throughout the trading day and all trading days. Time in positions can dramatically change results.
- Speculating is the most intense strategy taking the most time to play well. Successful speculations can produce spectacular results and are repeatable in favorable circumstances. But conditions and markets change and results can vary from hot and spectacular to stone cold and a total loss. Speculation takes the most time and produces the most irregular results.
- Risks vary by strategy
- Investing offers risks from low to medium
- Trading risks range from low to high
- Speculating risks are higher to extreme
- Returns vary by time and strategy
- Investing offers steady consistent returns
- Trading offers returns ranging from excellent to none
- Speculating offers returns from spectacular to total losses
- Wealth building winner among the 3 basic stock market strategies is investing.
Other Lessons Related To: These Three Big Money Makers Can Work For You
3 More small investor advantages
Know the trend for market direction
3 Distinct approaches to investing
Investing buy high sell low true or false?
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Money Choices Grow Wealth,
lesson links:
Introduction to Money Choices That Grow Wealth Lesson 1
3 Basic stock market strategies Lesson 2
Investing factors time and knowledge Lesson 3
Stock market trading strategies Lesson 4
Next lesson 3: Investing factors time and knowledge
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