Stocks: The stock markets fulfil the gambling urges of the speculator, but it is to the investor that the returns largely accrue. For many would-be and even long-standing private investors, the distinction may be foggy, but an understanding of the difference is critical to ensuring success in the stock markets.

In his most recent 2005 annual report, Warren Buffett opined that had Sir Isaac Newton, the great scientist, not lost a small fortune in the "South Sea bubble" of 1721, he might have gone on to discover the fourth law of motion - "that for investors as a group, returns decrease as motion increases".

Buffett, the iconic chairman of Berkshire Hathaway, is referring to the fact that too much trading activity is most likely to lower the returns one can reasonably expect to obtain from the stock markets over time. Constant activity, of course, is the hallmark of the speculator.

The speculator looks to get a return from the stock market on a short-term view. But the stock markets do not create wealth on a short-term view. It is in the medium to long term that the markets generate wealth as economies and businesses therein grow.

Undoubtedly, some speculators can win at playing the short-term game, but those that do are likely to emanate from the professional side of the business.

Stock market speculation is akin to playing poker; some win, some lose but, in aggregate, no new money is created. Indeed, speculators as a class are almost certain to lose money over time or, in a constantly rising market, to generate returns lower than were on offer.

Like property, all investors can obtain the returns on offer in the stock markets, and easily so if they adopt a steady businesslike approach to the markets. Undoubtedly, volatility in stock markets unnerves many, but volatility is not the same as risk and can be easily tamed through a programme of regular investing (see article dated June 2nd).

The enclosed table makes a distinction between the activities of the speculator and those of the investor.

If you find that you have been trading too often, introducing charting, technical analysis and options trading without having the necessary experience, and few private investors have, then the chances are high that you are engaged in speculative rather than investment activity.

Most likely you are also getting a speculator's results and perhaps without fully understanding why.

Contracts for difference (CFD) accounts have filled a gap in the marketplace by providing a borrowing facility within a stockbroking account.

There is nothing at all wrong with borrowing to invest in the stock markets.

But if you do so, the best returns will be obtained if you treat those borrowings like a mortgage and the companies that you own as long-term assets.

In five or 10 years, your aim should be to have a portfolio that has grown in value while your borrowings have remained fixed. After all, this is how people buy their homes.

However, most investors appear to use CFD accounts for short-term trading and, for this reason, I place CFD activity squarely on the speculative side of the chart.

Spread-betting is the latest stock market-related product whose introduction was made possible by advances in technology.

Today, there is a plethora of spread-betting companies springing up to promote their offering under the banner "trade better, trade smarter". All I can add here is that those who open spread-betting accounts will get the same returns as they would from time and money spent down in the bookies.

It is the companies and management thereof that generate the growth in business value. For an investor, returns are ultimately determined by the "value" that he/she acquires upfront.

Judging business value is a good deal simpler than many believe and will be the subject of next week's article.

• This series of articles is being written by Rory Gillen, who manages the Select GV Equity Fund in Merrion Capital and is the course director for the stock market training company Invest Like the Best (www.investlikethebest.com).

• A copy of all six articles can be obtained by emailing him at r.gillen@iltb.ie