Many discuss the idea of investing.  There are [videos](https://leofinance.io/@leoglossary/leoglossary-video) and articles with all kinds of insights into how should one approach investing.

Unfortunately, there seems to be a fundamental principle overlooked in all this.  While many will tout the merits of [dollar cost averaging](https://leofinance.io/@leoglossary/leoglossary-dollar-cost-averaging-dca), few take the time to explain the two major [investment](https://leofinance.io/@leoglossary/leoglossary-investment) classes.

In this article we will cover them.

 https://i.imgur.com/LcjMsM6.png 

[Source](https://cdn.educba.com/academy/wp-content/uploads/2019/07/Investment-vs-Speculation.jpg)

## Yield Investing

The primary investment vehicle is [yield](https://leofinance.io/@leoglossary/leoglossary-yield) investing.  This dwarfs the second category as evidenced by the [market capitalizations](https://leofinance.io/@leoglossary/leoglossary-market-capitalization) of each.

Yield investing is seeking a guarantee [return](https://leofinance.io/@leoglossary/leoglossary-return-on-investment-roi).  It basically can be summed up in one word: [bonds](https://leofinance.io/@leoglossary/leoglossary-bond).

This is not the full spectrum though.  We can include [certificates of deposits](https://leofinance.io/@leoglossary/leoglossary-certificate-of-deposit-cd), [mortgage backed securities](https://leofinance.io/@leoglossary/leoglossary-mortgage-backed-security-mbs), and even [dividend](https://leofinance.io/@leoglossary/leoglossary-dividend) stocks.

The idea is to garner a specific rate of return.  This is derived for the [APR](https://leofinance.io/@leoglossary/leoglossary-annual-percentage-return-apr) due to the payouts.  [Price](https://leofinance.io/@leoglossary/leoglossary-price) movement is not really factored into the equation.

Bonds, when held for [maturity](https://leofinance.io/@leoglossary/leoglossary-maturity), has a specific price which is paid at maturity.  The reason is because this is essentially a [loan](https://leofinance.io/@leoglossary/leoglossary-loans).  Therefore, when the loan is due, the [money](https://leofinance.io/@leoglossary/leoglossary-money) is paid back with [interest](https://leofinance.io/@leoglossary/leoglossary-interest).  This is known as the [coupon rate](https://leofinance.io/@leoglossary/leoglossary-coupon-bond).

As stated, this is the largest part of the investing world.  It is not sexy and overlooked in favor of the other investment model.  Nevertheless, when looking at building [wealth](https://leofinance.io/@leoglossary/leoglossary-wealth), yield investing is crucial.  It is a way to put assets to work which generate a steady return.

The key is to simply keep compounding this for larger returns.

## Speculation Investing

This is what gets the headlines.  

Buy low, sell high.  It is the fascination of Hollywood and the [financial](https://leofinance.io/@leoglossary/leoglossary-finance) media.  This is where the juices get flowing.

With a speculative [asset](https://leofinance.io/@leoglossary/leoglossary-asset), the return is mostly from the movement in the price of the [security](https://leofinance.io/@leoglossary/leoglossary-security).  Let us use [Tesla](https://leofinance.io/@leoglossary/leoglossary-tesla) as an example.  This stock pays no dividend.  Thus, is [investors](https://leofinance.io/@leoglossary/leoglossary-investor) want to make money, they have to sell at a higher price than they bought.

Of course, a loss is incurred when the price goes down.  It gets locked in when the sale takes place but, anyone who was in the [market](https://leofinance.io/@leoglossary/leoglossary-market) for any time, knows what a paper loss looks like.

Most of [cryptocurrency](https://leofinance.io/@leoglossary/cryptocurrency) falls into this category.  People buy [bitcoin](https://leofinance.io/@leoglossary/leoglossary-bitcoin) with the hopes it will [moon](https://leofinance.io/@leoglossary/leoglossary-mooning).  Lambos for everyone is the mantra during [bull markets](https://leofinance.io/@leoglossary/leoglossary-bull-market).

Naturally, the sentiment is much different during the [bear](https://leofinance.io/@leoglossary/leoglossary-bear-market).  People are not so optimistic when the price action goes from $65K to $25K.  This can puncture the optimism of anyone.

This is the [risk](https://leofinance.io/@leoglossary/leoglossary-risk) with [speculation](https://leofinance.io/@leoglossary/leoglossary-speculation).  While the payoffs can be large, the losses can be the same.  In fact, it is possible to lose all one's money.

While this can happen with yield investing, usually [fixed income products](https://leofinance.io/@leoglossary/leoglossary-fixed-income-instruments) have protections in place.

## Smart Versus Dumb Money

It is often said the bond market is the smart money whereas [stocks](https://leofinance.io/@leoglossary/leoglossary-stocks) are dumb money.  I added the idea of moronic money to include cryptocurrency.

The point is the level of sophistication of each.  Speculation is akin to gambling in many ways.  With cryptocurrency, much of the activity resembles people simply dropping money on a spin of the roulette wheel.  While there is nothing wrong with this, it is not something that most should adhere to.

Ultimately, people need to decide what is the best approach for themselves.  It would seem like a mix is what fits the largest group of investors.  Having some assets paying a steady yield can be the foundation for a [portfolio](https://leofinance.io/@leoglossary/leoglossary-portfolio).  At the same time, taking a risk on some other assets that could moon might be worthwhile it managed properly.

Hopefully people start to look at investments through this lens.

Article by @taskmaster4450le

Posted Using [LeoFinance Alpha](https://leofinance.io/@lbi-token/speculation-versus-yield)