The word “investor” is generally used to refer to someone who owns a stock.
However, very often this may not be accurate. Someone who purchases stock can be either a speculator or an investor.
Which Is Which?
An investor takes the time and effort to research a company and figure out how well it is doing. They only purchase stock if it is trading at a discounted rate. An investor always takes data into account and does not let their emotions rule them. They are methodical and they have a set of rules when it comes to investing.
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A stock price may deviate from its fundamentals. However, this usually does not last long. Value investors believe that fundamentals will prove to be right after some time. Hence they look for undervalued stocks in the hope that the true value of the stock will be realised in the future.
A speculator is not an investor. Speculators purchase stocks for very different reasons. Many times, they purchase shares because they saw someone else buying the same stock, or because they saw a sudden rise in the stock price. They do not dp the right research and many times do not even research into a company. They are merely speculating about the movement of the stock pricec. Therefore, they are opening themselves up to a lot of risk. Some speculators do make money, but they rarely continue to make money over a long period.
The only people that should follow this method of buying stock is those that do not have a problem losing everything they put in.
If all the investors participating in the stock market were truly investors, market prices would be closer to the value of the underlying assets.
However, most of the time buying and selling decisions are made irrationally. Hence, we often see a gap between the market price of a stock versus its true value.