So what\’s the dividing line?

But investors can too often also be speculators, seeking profits on bond trades affecting millions of families and jobs.

An investor is seeking a profit on his bond trade. A speculator is seeking a profit on his bond trade.

So, umm, what\’s the dividing line?

In Guardianspeak it\’s obvious of course: an investor is someone putting their money somewhere the Guardian approves of, a speculator is someone putting their money somewhere The Guardian does not approve of.

But out here in the real world: where is that dividing line?

15 thoughts on “So what\’s the dividing line?”

  1. Think mutualist symbiosis and parasitic symbiosis. An investor invests their money as part of a profitable strategy which strengthens the recipient, to their mutual advantage. A speculator invests their money as part of a profitable strategy without giving a flying truck as to its wider effects on its host. Like tape-worms, for example.

  2. Starter to 10: If you bought the shares/bonds/etc from the issuer i.e. the company itself, then you invested in that issuer/company. You are an investor.
    If you bough the shares/bonds second hand, you might not be an investor. You might still be performing a useful function (liquidity), but you are no more an investor than a second hand car dealer is an investor in Ford.

  3. …..but you are no more an investor than a second hand car dealer is an investor in Ford….

    Then why are we paying dividends?

    Are you only an investor in property if you buy a new house?

  4. The last time I heard that distinction was from some vile anti-semite explaining why Jewish bankers were evil speculators and good Aryan investors didn’t need ursury to make money. I won’t link to it for obvious reasons, but if Tim wants to have a laugh comparing the Guardian and neo-Nazi economic plans, he’s welcome to email me for the url.

  5. Yet, if there wasn’t a second-hand market in Ford’s cars, the price they would be able to sell the new ones at would be lower – which would impact on their profitability.

    So, in the wider economic sense, the people putting money into establishing the second-hand market – whether it is car dealerships or estate agents are investing and one of the indirect results of their investment is an improvement in the fortunes of the manufacturer.

    It’s that evil capitalist / free-market money-go-round again. Surely, that must be eradicated in the name of institutionalised equality and diversity and replaced with a properly policed regime of 5-year plans to meet the goals of the commentariat?

  6. So lets assume there was no secondary market in shares. There is only new issues by new start-ups or existing companies looking to raise money for expansion, and the only way to cash out your investment would be to liquidate the company, or for the company to buy its own shares back out of retained profits, or borrowings.

    What would new investors do? They are in it for profit, so I suggest they would demand some enforceable way way of being able to cash out at some point in the future, which would put massive artificial barriers up to long term growth. If every time the company made extra profits the investors demanded it back as cash, this would put a big drag on growth. The secondary market allows the initial investors to cash out their investment without forcing the company to lose capital to do so. So by buying a share you are investing in Barclays (say) because you are replacing (at a millionth hand) the capital put up by the initial investors. Its just less hassle to do it that way that expect the company to pay out one shareholder and issue new shares to another.

  7. Isn’t it just one of those irregular verbs?
    I/we invest.
    You/he/they speculate.

    As in “the government is speculating in creating jobs in green technologies.”

  8. When I worked in the city there was a little aphorism for this. I’m not sure I recall it correctly, but it went something like “If you hold for a year you’re investing, if you hold for a week you’re speculating, if you hold for a day you’re gambling.

  9. David Jordan – by that logic, my grandma, who had all her money in government bonds because she was so risk-averse, was a speculator and the equivalent of a tape worm. (She really wasn’t doing it because she thought that she was in partnership with the government.)

    Personally I think that’s a bit of an unusual definition.

  10. A couple of commenters might be over interpreting me here. I am *not* saying that speculation is bad. On the contrary I explicitly stated that speculation *can* be useful, and Jim/SE put more flesh around that. I also accept that those liquidity benefits can indirectly flow back indirectly to the issuer.

    That’s not to place value judgements on the different categories, but just to describe important differences.

    Bloke in Spain – when my family bought shares in a company, no one though we were investing in that company. We were quite clear we had different view on price movements to the seller. I speculate.

    What I admire about the right is its willingness to describe the world as it is before examining how it could/should be. But that’s not happening here. It is not helpful to conflate the original investor with the secondary speculator.

  11. Hmm.
    Both are labels attached to people who buy an assett in the expectation or hope of making a profit. You might say investing is for the long-term and speculation for the short-term, but then no-one can draw a defensible line between the two (It is the paradox of the heap).

    Another view entirely is that an investor is one who seeks to protect his assetts by diversifiation, so as to reduce the impact of a big loss in any one investment (in my view this one of the key factors in how and why capital markets start). A speculator then is one who concentrates assets in order to make a bigger overall gain from a favourable movement in any one investment. In priciple you could tell whether an investment decision was towards or against diversification, and have an objective criterion to distinguish between investment and speculation.

    From this perspective, of the two gods who rule the markets, Fear drives investment and Greed drives speculation.

    Dress fear up as Prudence, and you can see how someone might imagine that investment=prudence=good in a moral sense; and speculation=greed=bad in a moral sense.

  12. Gary – your proposed definition does provide a dividing line, but the definition doesn’t seem to match up with how most people use the term – eg is buying land, or an existing house, necessarily a speculation rather than an investment? How about someone who buys shares in an IPO planning to sell them immediately?

  13. I agree though that most people like to think of themselves as investors, not speculators, partly because of the stigma around being a speculator. But a rose by any other name and all that.

    The housing example is difficult because it is a ‘mixed use’ case i.e. we buy a house to live in it! So in that sense its an unusual example.

    As for the IPO example, that’s an example of earlier commentators pointing out that the secondary market can have a useful purpose. But regardless of how long you kept the shares, the company/issuer still got your money to invest in growing the business. The second owner bought out your rights to the divident, etc but they still didn’t invest in the company. They simply speculated that the value of the shares/bonds would offer attractive returns. You probably disagree or you wouldn’t have sold.

  14. Gary, my point about the IPO was that most people I think would call that speculation, not investment, if they were making the distinction, but your proposed definition is the other way around.

    And a house can be bought with the intention of renting it out.

  15. Tracy, I see. Sorry. In which case I refer you to Bloke in Spain @7 above. Many people probably do use it as an irregular verb then:
    “I/we invest.
    You/he/they speculate”

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