Buying an asset or financial security for short-term gain
Buying an asset or financial security for short-term gain
Speculation is the buying of an asset or financial instrument with the hope that the price of the asset or financial instrument will increase in the future. Speculative investors tend to make decisions more often based on technical analysis of market price action rather than on fundamental analysis of an asset or security. They also tend to be more active market traders – often seeking to profit from short-term price fluctuations – as opposed to being “buy and hold” investors.
Speculation is often frowned upon and derided by many financial experts. However, the truth is that speculators do not deserve the common public perception that casts them as “bad guys”. Speculators aren’t bad guys – they’re helpful guys (and gals). Speculators are the people who create fortunes, nourish ideas, businesses, and economies, and who help create “the next big thing”. Bill Gates and Steve Jobs were speculators; Warren Buffett is a speculator. Venture capitalists – the people who fund start-ups for new ideas and new businesses – are speculators. In short, speculators are an important and valuable part of the world’s financial markets.
Speculators are people who engage in speculative investments. In other words, a speculator is a person who buys assets, financial instruments, commodities or currencieswith the hope of selling them at profit on a future date. So they’re not really all that fundamentally different from other market participants who also enter the financial markets looking for financial rewards. Many people point to the main difference between investors and speculators as follows:
An investor is concerned with the fundamental value of his investment, whereas a speculator is only concerned with market price movement. In other words, for example, a speculator doesn’t really care if a company is performing well or poorly – only about whether or not he can profit from trading the company’s stock.
“Modern usage has made the term speculator a synonym for gambler and plunger. Actually the word comes from the Latin ‘speculari’, which means to spy out and observe. I have defined a speculator as a man who observes the future and acts before it occurs. To be able to do this successfully — and it is an ability of priceless value in all human affairs — three things are necessary: First, one must get the facts of a situation…Second, one must form a judgment as to what those facts portend. Third, one must act in time, before it is too late…If action is delayed until the need is apparent to everyone, it will be too late.” – from “My Own Story”, by Bernard Baruch
Bullish vs. Bearish Speculators
Stocks that are considered highly risky in the stock market are known as speculative stocks. Speculative stocks offer potential high returns to compensate for the high risk associated with them. Penny stocks with very low share prices are an example of speculative stocks. Some stock market speculators are day traders who seek to profit from the intraday fluctuations in stock prices that occur within the trading day. As noted above, speculators are important to publicly-traded companies because they are willing to invest in unproven companies, providing those companies with equity funding that enables them to grow and expand their market reach.
The foreign currency exchange (forex) market is popular with speculators because of the fact there are constant fluctuations in the exchange rates between currencies, both on an intraday and long-term basis. The currency market also provides frequent trading opportunities due to the many different currency pairs that are available for trading. For example, the exchange rate of the US dollar can be traded relative to more than a dozen other currencies worldwide. Among the most commonly traded currency pairs are Eur/Usd (the euro vs. the dollar), Gbp/Usd (the British pound vs. the dollar), and Usd/Jpy (the dollar vs. the Japanese yen). Forex trading is also popular with speculators because of the high amount of leverage available, which makes it easy for traders to generate substantial profits using only a small amount of trading capital.
In the commodity markets, speculation is important to control the price volatility of commodities because without speculators there would be only a very limited number of market participants. Commodities are much less widely traded than stocks. Speculators add significantly more liquidity to the commodity markets, thereby helping to facilitate trading among all the market participants. Speculation in commodity futures is popular because, like forex trading, commodity trading offers traders high amounts of leverage.
Speculators also influence prices of commodities in a way that helps to protect against massive price swings by using futures contracts to encourage buyers to stockpile in order to prevent shortages.
Speculators, by vastly increasing the number of market participants, also importantly serve to prevent market manipulation. With so many traders holding a variety of trading positions, it is difficult for even the largest participants in the market to successfully manipulate prices or “corner the market” (take control of virtually all the supply of a commodity).
Speculation remains a primary force in the financial markets, regardless of the Dodd-Frank Act’s attempt to curtail it. As long as there is trading in assets and financial instruments, with the potential for profit, there will be speculators aiming to make money.
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