A:

A speculator is anyone who trades derivatives, commodities, bonds, equities or currencies with higher-than-average risk in return for higher-than-average profit potential. Speculators can include individual investors, institutional investors, hedge funds, pension funds, investment banks, index funds and exchange-traded funds (ETFs), and can participate in any financial market. The key role of speculators in the market place is to add liquidity by providing buyers and sellers with partners for their desired trades. Liquidity maintains order within the financial markets and is the key driver behind efficient exchanges. Speculators add huge amounts of money to the markets, and the more money they invest in the market, the more liquid it becomes. An efficient market (very liquid) allows for buyers and sellers to trade with one another with relative ease without causing large shifts in prices.

Speculators in the past have come under much scrutiny for the unpredictability of the markets, namely the sharp peaks and valleys associated with prices in the commodity markets. While speculators have been labeled as greedy and irresponsible during times of high gas and food prices or sudden currency devaluations, it is important to mention that speculators are not solely to blame for these sharp increases or decreases in value.

Financial systems are guided by countless micro and macroeconomic factors, along with the movement of financial markets. Increased demand for commodities, equities and currencies will almost certainly drive the value of these items upward, and with increased demand comes more buyers. Without a comparable amount of sellers in the marketplace it becomes illiquid, creating an inefficient marketplace which could lead to even higher prices. Speculators, by taking on the increased risk of adding large sums of money to the market place to create liquidity, demand increased profits for those risks. It has been argued that speculators actually have a calming effect on the market place due to their large positions and constant need to balance those positions. As well, speculators allow countless individuals and institutions to protect their investments by providing a willing trading partner in hedging strategies. (For more on commodities, read An Overview Of Commodities Trading.)

Although speculators are an integral part of the financial landscape, it should be noted that there have been many cases of speculators manipulating the markets illegally to profit from the results. Such speculation can be difficult to monitor and can drastically affect the financial system. Speculators are a very important component to the marketplace, but speculators who partake in "excessive speculation" can definitely have a destabilizing effect on the financial system.

To learn about speculating read our related article Arbitrage Squeezes Profit From Market Inefficiency.

RELATED FAQS
  1. What is the difference between investing and speculating?

  2. What is the difference between speculation and hedging?

    Learn about speculation and hedging, the difference between them, and how traders and investors speculate and hedge. Read Answer >>
  3. How can derivatives be used for speculation?

    Find out more about derivative securities, speculation and how derivatives could be used to speculate on the price of the ... Read Answer >>
  4. What is the difference between a banker's acceptance and a post-dated check?

    Learn more about speculation, stocks and options and how speculators use these financial instruments in an attempt to profit ... Read Answer >>
  5. What is the difference between speculation and gambling?

    Learn about speculation and gambling, examples of speculation and gambling, and the main difference between a speculator ... Read Answer >>
  6. What is the difference between hedging and speculation?

    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying ... Read Answer >>
Related Articles
  1. Trading

    Market Speculators: More Help Than Harm

    Speculators often get a bad rap, but it's important to remember that they only observe trends, not manipulate them.
  2. Trading

    Speculation

    It may sometimes be difficult to distinguish between speculation and investment - learn more about how the speculation differs from investment in terms of risk taken and gains achieved.
  3. Investing

    Commodities Relative Value

    In this special report, we take a close look at the hedge fund segment, considering key characteristics and performance trends, and offering our outlook for the rest of the year and beyond.
  4. Managing Wealth

    How To Invest In Commodities

    Find out which futures, options or funds will be your perfect commodity portfolio fit.
  5. ETFs & Mutual Funds

    Evaluating Hedge Fund Performance

    Most investors are aware of hedge funds, but many don't know the dirty details of this unique investment type.
  6. ETFs & Mutual Funds

    Hedging With ETFs: A Cost-Effective Alternative

    The benefits of ETFs for hedging are clear and investors of all sizes are taking notice.
  7. Investing

    Financial Markets: Capital Vs. Money Markets

    Two commonly used components of the financial market are money markets and capital markets. Find out the similarities and differences between them.
  8. Trading

    Put Option Basics

    Put option allow investors to hedge an investment they own or speculate in an investment they don't own. Find out more about this type of option and how it can work in an investor's favor.
  9. Trading

    4 Factors That Shape Market Trends

    Trends allow traders and investors to capture profits. Find out what's behind them.
  10. Trading

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
RELATED TERMS
  1. Speculator

    A person who trades derivatives, commodities, bonds, equities ...
  2. Speculation

    The act of trading in an asset, or conducting a financial transaction, ...
  3. Speculative Stock

    A stock with a high degree of risk. A speculative stock often ...
  4. Speculative Flow

    The movement of speculative capital between different assets ...
  5. Speculative Capital

    The funds earmarked by an investor for the sole purpose of speculation. ...
  6. Speculative Risk

    A category of risk that, when undertaken, results in an uncertain ...
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center