How is investing in the stock market different from speculating?

With the rising digital trend and greater access to knowledge, a majority of people have come across the role that the stock market plays and vitality of the same in any economy. But many are still oblivious to it. Many myths prevail around stock market investments. One of the common ones is where people perceive the stock market to be akin to just a mere game of speculation. 

However, when there are so many huge institutions seeking different kinds of “alpha” to make money and the various algorithms already exist, one thing is for sure: investment in the stock market is not purely a speculation proposition, and when you make an informed investment responsibly, you will reap the rewards.

Steps towards investment in stocks

Define objective: Like in any financial planning tool, investment in the stock market also requires you to define your investment objective, as in the tenure of the investment (long term, medium term, or short term) the strategy (playing of an event/value), and an exit plan.

Choose a partner: There are a variety of players in the market that allow you to enter the Indian stock market. Choice of the player depends upon costs charged and the trust a customer can place in the brand.

Analyse: When you have an existing account and have clarity regarding your investment objective, the next step is to identify the opportunity where you want to invest your capital. There will be a certain set of parameters depending upon which you will be employing your capital.

Invest: After you have decided which stock to invest in, you will need to determine the magnitude of your investment and execute your trade. It is critical to understand the investing aim and reasoning behind the transaction before proceeding.

Diversify: Another vital step after making an investment decision is further investment in the market but with a strategy to diversify your investment sector-wise or categorically. You should not put all your capital in a single stock. A diversified portfolio will help in achieving your goals in the long term and shelter you from sector-specific events.

How is investing not similar to speculating?

Value creation: The stock market creates value for investors, the company, and the economy. It is an important part of the movement of capital, whereas the game of speculation mandates that when one person wins, the other has to lose.

Informed decision: Stock market investments for a prudent investor are backed by different approaches of fundamental market analysis, technical analysis, or qualitative analysis, but when it comes to speculation, the decision is based on luck, superstitions, or impulses.

Long-term approach: Stock market investments can keep on adding to the person’s portfolio in the long run if the investment is done in stock of a company with excellent managers and has an efficient line of work, whereas speculation is a short-term game of chance.

Economy: The stock market enables the functioning of the economy by aiding in the movement of capital and providing fair pricing to the inherent stock in question, whereas speculation has no role in the economy.

For everyone: The stock market is open for everyone without any favouritism. Depending on one’s risk appetite, everyone can start investing in the stock market; even a small-scale investor can buy and hold a stock with a minimal amount of money. 

The bottom line 

Speculation is a process in which one simply places bets on something and, depending on whether it goes right or wrong, one person wins and the other loses, with no value addition. On the other hand, the stock market creates value by allowing a person seeking liquidity to transfer their holding of shares to another. Simultaneously, the stock market allows for the generation of wealth for investors seeking to create a corpus by investing in value propositions. As it may be apparent by now, the stock market is not a game of chance.

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