To overcome future uncertainties is the task which the speculator sets before himself. In theory a spec ulator is one who is engaged in foretelling the power ful changes in prices, but in practice he puts his in formation into effect by purchasing or selling com modities or securities. His supposed ability to fore tell prices is the foundation upon which he works. Speculation must involve reflection and careful think ing on the one hand and, on the other, the assumption of risk, conscious or unconscious, on the basis of this decision. The profits, if there are any, are the re ward given for this reflection, foresight, forethought and lalowledge of facts. We may distinguish the two relationships, investment and speculation, from no less than seven different points of view. These will now be discussed.
3. Safety and risk.—A man is said to have made an investment when the element of safety predomin ates in the enterprise to which" he entrusts his funds. The undertaking is speculative if risk is involved to more than ordinary degree. The danger and greater liability to fluctuation does not make a very strong appeal to every one. But because it carries with it the expectation of a rise and a consequent source of profit, there are found these who are willing to under take the risk.
Practically speaking, it is often extremely difficult to differentiate these terms very clearly and to state at just what point one relationship merges into an other. When is an enterprise sufficiently devoid of danger to call the placing of money in it an invest ment, and at what point may one unquestionably main tain that the peril to which the capital is exposed suffi ciently warrants its being described as a speculative endeavor? To this question, no hard and fast rule can be applied except thru the standard set by expert opinion. The general convictions of veterans in in dustry and commerce, men who have learned some les sons in business life thru personal contact and expe rience, serve as good criteria of the propriety of including the undertaking in one of the two classes.
4. Income and profit.—The distinction between in vestment and speculation, leads to the use of the two words, income and profit, as applied to the revenue derived from the respective businesses. The former designates a steady and regular inflow, while the latter implies a return which fluctuates with external conditions. Two individuals, for example, have $10, 000, one of whom buys United States Government per cent bonds, and the other, common stock in a cor poration. One receives a yearly income of $250, the
other obtains a profit, which, however, cannot be de termined until the fiscal year is complete. Profits on the common stock may in one year rise to 40 per cent on the capital invested while, in a year of depression or crisis, they may be reduced to a low level or be omitted altogether. In the case of an investment, the indi vidual expects to derive a definite sum during the year, which is not subject to any substantial changes. But when one is willing to be carried along on the waves of business prosperity, securing a larger sum when business is in a boisterous state and a much smaller amount when the storm breaks, he counts his varying yearly income as profit. That, at least, is the case when he retains the security. However, the or dinary security speculator does not usually purchase with the intention of retaining control indefinitely. He tries to sell at the earliest possible moment when profits may be realized. Securities are dealt in by him merely for their anticipated increase in value. The increase in them is called profit.
5. Method of purchase.—The investor, as a rule, buys securities or commodities outright. The specu lator, on the other hand, buys on a margin. Inves tors may, it is true, occasionally buy "on margin," but speculators rarely buy in any other way. The amount of their capital is limited, but their operations are ex tensive. Placing small amounts here and there en ables them to spread their capital over a wider area of the security market than would otherwise be pos sible, and aids in' equalizing their risks and gains. The speculator realizes quite well his liability to ruin and tries to ward against it by "covering" and "hedg ing." 6. Ownership of capital.—Another point of differ ence between speculation and investment is the nature of the ownership of the sum put into the enterprise. This follows as a direct result of the methods of pur chase. The individual who possesses a surplus at his disposal which he desires to invest does so for the pur pose of making it productive. It must not be idle but should be converted into an income-bearing source. He invests the whole sum in a way that he believes to be feasible. On the other hand, the speculator buys on a margin because he does not want to tie up his limited resources indefinitely by buying out right. He must always be alert and active, prepared to buy at a moment's notice any active commodity or security which indicates a possible source of gain to him.