Should you Invest or Speculate?

In my article ”How to Generate more income beside your full time job”, I talked about investing in stocks to put our day job earnings to work in order to earn money even during our sleep.

Most financial advisors would say to invest passively through mutual funds and buy stocks and hold on to them for the long run. It is passive investing. It works if you choose good companies. The earnings in the long run are good but could be better. I am not talking about investing your money and forgetting about it.

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I am talking about taking control of your finances and spending time  on your investments just like you would on your other businesses. Companies stocks increase and decrease in value. When they increase, you have unrealized gain, and unrealized loss when they decrease.  When you monitor your investments, you could sell stocks at profit and lock in the gain and reinvest in it when it goes down. By doing so you are speculating. The ups and down in the stock price of a company over a short period of time only reflect people’s belief in the company during that short time frame. It doesn’t reflect the true value of the company. So you are not investing in the company because you believe in their management, but you are making money over people’s assumptions.  In the meantime, it pays to invest in companies that pay some dividend so that while you are waiting for the price to go up your money is generating some income for you.

Speculating doesn’t me you have to trade daily. You buy the stock at a low price and sell it when the price rises. It could take about 6 months. You sell it before it goes down again. And you lock in your gain which increases your capital available to invest in your new stock that you should have spotted by the time you sell the previous one. It is good to trade in your Roth IRA as your gains are not taxed. You can keep your long term investments in your brokerage account.

You can invest and speculate. You want multiple sources of income. There are stocks like Johnson and Johnson, that I have for over a year and don’t have any plan of selling as well as Total. Although I would say that Total  shares that I own for over 2 years, there were times the price roses and I could have sold them and didn’t until they went down. IBM stock price went down since I bought its stock and it has been low since. It is a good company and it pays to keep it in my portfolio. But sometimes I wonder if it was a good buy. My money would have been worth elsewhere. I purchased few share of Tyson when the price was low earlier this year. It went down after my purchase and stayed low for months. Last months It went back up and at one point I have over $100 unrealized gain. I sold it to lock the gain in before the price goes down again. I am researching another stock to invest that money I free in. When you speculate, you would lose money if you invest in a company that files bankruptcy later or the price goes down and stays down. You would gain money as well as loose money when you speculate. If you track your numbers you would see that your realized gains would out beat your loses.  Speculating increases our initial investment capital as you don’t cash your gains but reinvest them.

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My husband purchased stocks for  $500  in his brokerage account in 2016 and sold them for a revenue little over $1,000 with a profit about $500. He earned an additional $2 in dividend. I advised him not to trade too much in his brokerage account as he would pay tax on these short term gains.

During the same period, he invested $1,000 in his Roth IRA and traded stocks for a revenues little over $1,500 by the end of 2016, realizing  a profit over $400.

During the same year, I opted for a more conservative approach by holding longer on my stocks as an investment rather than a speculation. In my brokerage account, I invested $96 and sold stocks for $165 by the end of the year 2016 realizing a profit of about $68. In my Roth IRA, I invested about $1,100 and sold stocks for about $1,500 with a gain little over $300.

In 2017, we didn’t invest a lot due to our debts payment goals we set at the beginning of the year. We only have our allowances of $100  a month per person for our personal expenses that we saved to invest. In 2017, I purchased stocks for little over $2,000. This was possible because each time I sold a stock at a gain, I have more to reinvest without contributing much of my own money. I sold stocks for a total over $1,300 in 2017. These stocks I sold cost me about $1,100. I also included in the cost, stocks that became worthless. I have a profit over $200. As you can see, even though, I included the costs of stocks that became worthless, I still have a gain.

My husband also purchased stocks for little over $2,000 in 2017.  He sold stocks for  a total of $1,375. The cost of these stocks as well as the worthless ones were $946. His gain was $429. He doesn’t hold on to his good stocks as long as I do. If I like a company, I tend to keep its stock in my portfolio. My husband on the other hand, would prefer to sell it to lock in the gains. He would wait and rebuy it again when the price drops or buy something else for the time being.

You can invest in good companies and keep your money in them but at the same time you could speculate to generate additional income at a more active pace than the passive investment would otherwise.