To begin, I want to clarify that any response is acceptable. The issue emerges when you mix the two or switch strategies in the middle of the game. Understand the distinction between betting on a stock's price and investing in a business.

Trading Stock on Speculation

If you speculate in stocks, all you are doing is hoping for a return on your investment. You are purchasing because you believe there will be a price movement shortly. Because you are only interested in making money when a price changes, you may sell the stock and go on to another investment. You might decide to keep the stock for a short period or a lengthy period; it all relies on the price movements and the strategy you have in place. You have no actual stake in the firm that issued the shares other than that it is located in the ideal location at the moment.

Investing in a Company

When you invest in a business, however, it is because you have conducted a comprehensive examination of the firm and have determined that you feel it has the potential for long-term development or has assets that are undervalued. Following an examination of the balance sheet, you have concluded that it is unlikely that a significant loss would occur. In addition, you understand what the firm does and its position as a viable competitor in the market.

When you purchase a share to become an investor rather than a speculator, you do so with the understanding that you will keep your position for a significant amount of time. If the price falls, you are aware of the reason for the decline, and you can assess if this is a temporary circumstance or a change that will have a long-term influence on the stock price. After that, you will be able to behave appropriately.

When Stock Prices Fall

Both the investor and the speculator will be happy with how the stock's price is doing as long as it continues to perform well. On the other hand, the price of the stock begins to plummet is a different story. The astute speculator always has an exit strategy to stop even moderate losses from snowballing into catastrophic ones. If you are engaging in speculation, you do not have any emotional tie to the stock, which makes it simple to unload a losing position at a specified price point. When trying to limit their losses, some speculators believe that selling a stock after it has dropped 7% or 8% is the most effective strategy. If you put your sell level higher, you risk having a typical market blip trigger your sell signal, only for the stock and the market to recover after the sell signal was triggered.

Where Speculators Go Wrong

The difficulty with speculators is that they often lack sufficient knowledge about the firm to make informed judgments about whether or not to keep holding onto the stock or to sell it. They are not intelligent speculators anymore and are not intelligent investors. At this moment, it is impossible to determine the best course of action for them to take as investors. If an investor can maintain their composure in the face of deteriorating circumstances, they will almost certainly come out ahead financially. If the stock price lowers, you should reevaluate the firm and the market: Have you overlooked something important? Have there been any updates? Or do you think now is the right moment to increase your holdings?

Rules for Speculating in Stocks

It is essential to devise a strategy to avoid making a sudden transition from the role of the speculator to the investor and, as a result, losing out on potential rewards. Speculators should perform the following five activities, in addition to having criteria from which to get trade ideas:

• Establish a breakeven point for a loss.
• Determine a point when you can walk away with a profit.
• Consider imposing a time constraint on the transaction, if you so want (when a sale happens, regardless of the size of the gain or loss)
• Follow the guidelines exactly.
• Maintain a notebook to record your observations on the efficiency of the trading rules.

If your original reason for joining the trade is that something will happen quickly, such as earnings, a merger, or a speculated regulatory change, then time constraints may be advantageous. Time limits can be useful if your initial reason for entering the trade is that something will happen shortly. You should leave the deal when the original reason for joining the trade is no longer valid since sufficient time has elapsed. This also applies to day trading, which is focused on very short-term market swings. If, after the allotted amount of time, it still hasn't worked, you should leave.