Investment, or speculation? When you decide to invest, the first step is to ask a couple of questions: 1) how tolerant are you of the risk associated with investing, and 2) for what timeframe are you investing your funds?

These two questions are inextricably entwined. If you need your money in a short time, then you probably won’t accept a lot of risk. For example: You’ve received an inheritance and want to invest it for one year, then use it as a down payment on a house. It would be a mistake to bet on a hot stock in the hope of doubling your money, because that also means you might end up with far less than you began with. Conversely, a very long timeframe (meaning the money is absolutely not needed for living expenses or planned purchases anytime soon) makes it reasonable to accept the risk of short-term fluctuations in value in the expectation of seeing higher returns over the long run.

And this leads to the notion of speculation. To realize high relative returns, you must generally accept higher volatility and higher risk. However, trading for the short term, or eschewing diversification by holding one or only a handful of positions, is speculating. Sure, the broad activity is called investing, but the specific tactic is speculative in nature. You can, however, fortify your speculation with solid research or advice. For more information, see the section Make a Move: Selecting a Stock.

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