Speculation (Investing) - Explained
What is Speculation?
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Table of ContentsWhat is Speculation?How Does Speculation Work?Speculation and the Forex MarketSpeculation and the Bond Market
What is Speculation?
Speculation is the act of trading a financial instrument with prevalent risks with the expectation that it will offer significant gains or returns in the nearest future. In the purchase of asset or investment, speculation refers to an act of buying an asset based on the belief that it will increase in value. It is the purchase of an asset that has significant risk with the hope that it will also offer substantial returns. When an investor uses speculation, it is an act of buying or selling stocks or investment position with the purpose of making profits quickly. An investor who speculates enters short-term positions in the market with the expectation of earning significant returns on the position.
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How Does Speculation Work?
Speculation can occur in different trades, such as real estate transactions, trading of stocks and securities and in the investment market. Speculation is closely associated with many investments, in fact, it will be difficult to distinguish a speculative position from a simple investment position, especially in real estate. For instance, if an individual purchases a commercial property, for the purpose of renting it out to make a profit, there is a thin line between speculation and investment in this case. Traders and investors engage in speculation because of the hope of a significant return. Speculations help participants in the market to hedge price risk.
The important things you should know about speculation are;
- Speculation refers to an act of trading (selling or buying) a financial instrument that has a high level of risks and also has a promise of significant return.
- Investors who enter short-term positions in the market with the expectation that there will be an increase in price is a speculator.
- The substantial profit or gains that security or financial instrument with high risks promise motivates traders to engage in speculation.
- Speculation differ based on the type of assets being speculated, the holding period of the asset and expected return of the asset.
Speculation and the Forex Market
The foreign exchange market is a type of market that is highly speculative. Buyers and sellers in forex markets trade based on speculations, they buy and sell their holdings building on the expectation of an increase in the value of their trade. The foreign exchange market is a big market that trades more than $5 trillion in a day. Transactions in the forex market are purely speculative. Buyers and sellers exchange currencies with the expectation that the profits or returns earned on one will hedge the loss accrued on the other. Real companies and financial institutions also engage in speculations in the foreign exchange market to mitigate the risks they are exposed to as a result of volatility in the market.
Speculation and the Bond Market
The bond market as a global market has a high level of speculation. Due to the frequent occurrence of fluctuations and volatility in the bond market, participants speculate a lot. In the bond market, individual and institutional investors take short positions in the market in expectation of a significant return on the asset of financial instruments within a short period.