Loading the player...

What is 'Speculation'

Speculation is the act of trading in an asset or conducting a financial transaction that has a significant risk of losing most or all of the initial outlay with the expectation of a substantial gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain, otherwise there would be very little motivation to speculate. It may sometimes be difficult to distinguish between speculation and investment, and whether an activity qualifies as speculative or investing can depend on a number of factors, including the nature of the asset, the expected duration of the holding period, and the amount of leverage.

BREAKING DOWN 'Speculation'

Real estate is an area where the line between investment and speculation blurs. Buying property with the intention of renting it out would qualify as investing, but buying multiple condominiums with minimal down payments for the purpose of reselling them quickly at a profit would undoubtedly be regarded as speculation. Speculators can provide market liquidity and narrow the bid-ask spread, enabling producers to hedge price risk efficiently Speculative short-selling may also keep rampant bullishness in check and prevent the formation of asset price bubbles.

Mutual funds and hedge funds often engage in speculation in the foreign exchange, bond and stock markets.

Foreign Exchange Market

The FX market is the world's largest market, with an estimated $5 trillion per day changing hands. The market trades around the world 24 hours a day; positions can be taken and reversed in seconds, utilizing high-speed electronic trading platforms. Transactions range from spot deals to buy and sell currency pairs, such as EUR/USD, for delivery in two business days to complex options structures with long-term payouts. The market is dominated by asset managers and hedge funds with multi-billion-dollar portfolios.

Speculation in the FX market can be hard to differentiate from hedging, which is when a company or financial institution buys or sells a currency to protect itself from market movements. For example, a sale of foreign currency related to a bond purchase can be deemed either a hedge of the bond's value or speculation; this can be especially complicated to define if the currency position is bought and sold multiple times while the fund owns the bond.

Bond Market

The global bond market is valued at an estimated $100 trillion, of which approximately $40 trillion is based in the United States. It includes debt issues by governments and multinational corporations. Prices can be very volatile, and they are strongly influenced by interest rate moves as well as political and economic uncertainty. The largest single market is for U.S. government Treasury bonds, and prices in that market are often driven by speculators.

Stock Market

Global stock markets are valued at an estimated $64 trillion. While many pensions and individual retirement accounts are for long-term investments, market movements are frequently driven by speculators.

RELATED TERMS
  1. Speculator

    A person who trades derivatives, commodities, bonds, equities ...
  2. Speculative Stock

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

    The movement of speculative capital between different assets ...
  4. Speculative Risk

    A category of risk that, when undertaken, results in an uncertain ...
  5. Speculative Company

    A company with a significant percentage of its assets tied up ...
  6. Speculative Capital

    The funds earmarked by an investor for the sole purpose of speculation. ...
Related Articles
  1. Financial Advisor

    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.
  2. Investing

    The Art Of Speculation

    Speculators believe that the market overreacts to a host of variables. These variables present an opportunity for capital growth.
  3. Investing

    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.
  4. Investing

    Speculating With Exchange Traded Funds

    More and more investors have been drawn to the often volatile ETFs. Learn how you can use this instrument for big returns.
  5. Investing

    Protect Your Foreign Investments From Currency Risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  6. Investing

    Do ETFs Drive Up The Cost Of Commodities?

    Find out if speculators are controlling the price of commodities and using exchange-traded funds to do it.
  7. Investing

    Spice Up Your Portfolio With International Bonds

    Going global can add flavor and diversity to an otherwise bland basket of bonds.
  8. 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.
  9. Investing

    Evaluating Hedge Fund Performance

    Most investors are aware of hedge funds, but many don't know the dirty details of this unique investment type.
  10. Trading

    Exploring Non-Dollar Currencies For Forex Trading

    Learn how investments in foreign currencies can diversify your portfolio.
RELATED FAQS
  1. Do speculators have a destabilizing effect on the financial system?

    A speculator is anyone who trades derivatives, commodities, bonds, equities or currencies with higher-than-average risk in ... Read Answer >>
  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. 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 >>
  4. 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 >>
  5. 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 >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center