Difference between investment and speculation

People often mistakenly take investment as speculation and speculation as investment. This is a very dangerous mistake. So people who want to invest money in stock market or who are investing should know clear distinction between both.

The father of value investing Ben Graham has given very precise definition of investment in his much popular book “Security Analysis”. This definition helps investors to spot the difference between investment and speculation. It reads, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." He says investment should be done based on sound fundamental analysis, investment should promise safety of prinicpal, and it should give adequate return. Now how much is adequate? over the long term, if average retun is more than average of (inflation + Fixed Deposit retun) then it can be considered adequate.

Graham also quoted, “in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine”. So he is suggesting investor to regard shares as ownership in business and should not concern about short term fluctuation of market. Here I want to give you one more quote which from warren buffet and he argued that this is most important word ever written in investment world, “investment is more intelligent when it is most business-like”.