Investing and Speculating.

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1. Define investing and speculating. The main difference between speculating and investing is the amount of risk undertaken in the trade. Typically, high-risk trades that are almost akin to gambling fall under the umbrella of speculation, whereas lower-risk investments based on fundamentals and analysis fall into the category of investing. Investors seek to generate a satisfactory return on their capital by taking on an average or below-average amount of risk. On the other hand, speculators are seeking to make abnormally high returns from bets that can go one way or the other. It should be noted that speculation is not exactly like gambling because speculators do try to make an educated decision on the direction of the trade, but the…show more content…
3.Define and explain the 5 major investment categories: common stock, bonds, preferred securities, convertible securities, and real estate. Common Stock- Common stocks are a form of equity— each share of stock represents a fractional ownership position in a corporation. A share of stock entitles the holder to equal participation in the corporation’s earnings and dividends, an equal vote, and an equal voice in management. From the investor’s perspective, the return to stockholders comes from dividends and/ or appreciation in share price. Common stock has no maturity date and, as a result, remains outstanding indefinitely. Bonds- In contrast to stocks, bonds are liabilities— they’re IOUs of the issuer. Governments and corporations issue bonds that pay a stated return, called interest. An individual who invests in a bond receives a stipulated interest income, typically paid every six months, plus the return of the principal ( face) value of the bond at maturity. For example, if you purchased a $ 1,000 bond that paid 10 percent interest in semiannual installments, then you could expect to receive $ 50 every six months ( that is, 10 percent × 0.5 years × $ 1,000) and at maturity recover the $ 1,000 face value of the bond. Of course, a bond can be bought or sold prior to maturity at a price that may differ from its face value because bond prices, like common stock prices, fluctuate in the marketplace.
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