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The following article is part of an ongoing educational series. The previous article can be found here.

The Nobel Prize-winning Russian physiologist, Ivan Pavlov, is best known for describing the relationship between stimulus and response through his simple experiments with a bell and a dog.

What Pavlov found was that by ringing a bell every time he offered a dog food, the ringing sound would eventually provoke salivation in the poor mutt, even if he didn't offer it food.

In a similar way, many novice investors view the sharemarket according to their learned responses. If you've only ever held shares in National Australia Bank (NAB) or the Commonwealth Bank of Australia (CBA) during the 1990s, for example, you may well salivate at the mere mention of banking stocks.

On the other hand, if your first dabble in shares was to take a punt on a rumour that a mining exploration company would strike the mother lode, you may well regard the sharemarket as little more than a casino. And the bell ringing in your ear would no doubt sound very different!

The reality for most people who have been around the market for a while is generally somewhere in between. Australians are among the biggest gamblers in the world, and if you want to take a punt on a share, there's ample opportunity.

While there are numerous ways of approaching the sharemarket, and while the lines between different approaches can easily become blurred, it's useful to draw an early distinction between two approaches: long-term investment and speculative trading.

American Benjamin Graham, a clear-thinking investment analyst who wrote the legendary texts Security Analysis and The Intelligent Investor, is known for his commonsense investment principles, many of which remain valid today.

Here's how he describes the difference between the two: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting those requirements are speculative." This distinction is worth considering every time you invest in shares.

Three types of shares, three layers of risk

Before exploring these two approaches, we'll divide the sharemarket into three manageable chunks to help clarify the distinction between long-term investment and speculative trading.

Within the sharemarket, some companies are more likely to produce a more consistent, reasonable return than others. That doesn't necessarily mean that they will produce a higher return and, in many cases, they won't. But it does mean that the chances of them producing a shocker of a result or a surprise downward spiral are regarded as lower, although there are no guarantees.