Speculation - Definition & Advantages of Speculation | What is Speculation? (2024)

FAQs

Speculation - Definition & Advantages of Speculation | What is Speculation? ›

Speculation is the act of making very risky investments in the hope of large gains. Internet companies with little to no profits were going public and enjoying significant stock price increases often based solely on industry speculation. The Euro ended speculation among the different national currencies.

1. : to take to be true on the basis of insufficient evidence : theorize. 2. : to be curious or doubtful about : wonder. speculates whether it will rain all vacation.

Speculation can be a boon and a curse for the stock market. It does provide much-needed liquidity to the market. But it can also lead to panic among investors.

Yes, day trading is considered a form of speculation. Day trading involves buying and selling financial instruments, such as stocks, currencies, or commodities, within the same trading day, with the aim of profiting from short-term price fluctuations.

Speculation in stock trading often hurts a stock, rather than helps it. Speculation often leads to panic in volatile markets. Losing investors start to sell off their positions, which causes their stocks to go down even further, which leads to even more selling and so on.

A speculative investment — or “when an investor hopes to profit from a rapid change in the value of an asset,” according to SoFi — can be fairly high risk, unlike traditional investments. Indeed, these tend to see frequent price movements and as such, can also be highly rewarding and provide portfolio diversification.

Bottom Line and Key Takeaways

Speculation is essential for the economy for market liquidity, price discovery, and capital allocation. The drawbacks of speculation include market volatility, asset bubbles, and misallocation of resources.

He dismissed their theories as mere speculation. The book is just a lot of idle speculation about the future. Her speculations leave many questions unanswered. He lost everything in foolish land speculation.

Definition: Speculation involves trading a financial instrument involving high risk, in expectation of significant returns. The motive is to take maximum advantage from fluctuations in the market. Description: Speculators are prevalent in the markets where price movements of securities are highly frequent and volatile.

What is the problem with speculation? ›

The major problem with speculation, besides it being non-productive, is that allows the possibility of price manipulation.

The speculation is driven initially by fundamentals—such as strong profit growth or expectations of future competitive dominance—but is soon taken over by factors that don't speak to the stock or sector's intrinsic value.

The governors of many Federal Reserve Banks and a majority of the Federal Reserve Board believed stock-market speculation diverted resources from productive uses, like commerce and industry.

Advantages of Speculation

Thus, speculators often provide the capital that enables young companies to grow and expand, or that provides price support for assets or industries that have temporarily fallen on financially hard times or out of favor.

As an individual action, speculation, at its best, is morally questionable.

The better speculators can predict the future, the more money they can make. When they make their predictions, they change the prices in futures markets. Prices in futures markets often have information built into them which tells you something about the future.

Bottom Line and Key Takeaways

Speculation is essential for the economy for market liquidity, price discovery, and capital allocation. The drawbacks of speculation include market volatility, asset bubbles, and misallocation of resources.

Speculators provide the markets with liquidity, aid in price discovery, and take on risk that other market participants wish to unload. In commodities markets, speculators also keep markets efficient and stave off shortages of goods by bidding them up when prices fall and financing the middlemen who link supply chains.

Speculators are important to markets because they bring liquidity and assume market risk. Conversely, they can also negatively impact markets when their trading actions result in a speculative bubble that drives up an asset's price to unsustainable levels.