Speculation

AAA

DEFINITION of 'Speculation'

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, in 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. While it is often confused with gambling, the key difference is that speculation is generally tantamount to taking a calculated risk and is not dependent on pure chance, whereas gambling depends on totally random outcomes or chance.

VIDEO

Loading the player...

BREAKING DOWN 'Speculation'

It may sometimes be difficult to distinguish between speculation and investment, and whether an activity qualifies as speculative or investing depends on a number of factors, including the nature of the asset, the expected duration of the holding period, and the amount of leverage.


For example, while acquiring an additional property (in addition to one's principal residence) with the intention of renting it out would qualify as a bona fide investing activity, buying half a dozen condominiums with minimal down payments for the purpose of "condo-flipping" would undoubtedly be regarded as speculation.

Speculation has its benefits in a free economy. By their willingness to assume the other side of the trade (for a price, of course), speculators provide market liquidity and narrow the bid-ask spread, enabling producers to hedge price risk. Speculative short-selling may also keep rampant bullishness in check and prevent the formation of asset price bubbles.

RELATED TERMS
  1. Speculation Index

    An index that is derived from the ratio of trading volumes on ...
  2. Take A Flier

    The slang term for a decision to invest in highly speculative ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has ...
  4. Venture Capital

    Money provided by investors to startup firms and small businesses ...
  5. Speculator

    A person who trades derivatives, commodities, bonds, equities ...
  6. Hedge

    Making an investment to reduce the risk of adverse price movements ...
Related Articles
  1. Investing Basics

    Master Your Trading Mindtraps

    Traders are only human; therefore, they are subject to psychological traps when they trade. Read how you can manage your emotions so that you can profit from your trading.
  2. Investing Basics

    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 Basics

    5 Ways To Double Your Investment

    From risky manoeuvres to slow-and-steady strategies, we look at five methods to double your money.
  4. Economics

    How Economic Reality Influences The Market

    The market is confusing enough. But when you consider how economic reality can influence market prices, it's downright baffling.
  5. Options & Futures

    Trading Gold And Silver Futures Contracts

    If you are a hedger or a speculator, gold and silver futures contracts offer a world of profit-making opportunities.
  6. Trading Strategies

    Introduction to Types of Trading: Fundamental Traders

    Learn about the different traders and explore in detail the broader approach that focuses on company-specific events.
  7. Home & Auto

    Uncover The Next Real Estate Hot Spot

    Real estate land speculation is a way to get in on a hot investment before a boom hits.
  8. Mutual Funds & ETFs

    ETF/ETN Analysis: iPath S&P GSCI Crude Oil

    Learn about iPath S&P GSCI Crude Oil exchange-traded notes and how investors can use this ETN to profit from short to intermediate changes in oil prices.
  9. Trading Systems & Software

    Use Price Action Trading Strategy for Results

    Bored by the fixed rules of technical and fundamental analysis? Price action trading allows you to customize your own trading strategy.
  10. Bonds & Fixed Income

    Brave Enough to Invest in Greek Bonds? Here's How

    Learn how an individual investor can invest in Greek government bonds, along with an overview of the substantial risks and potential profit.
RELATED FAQS
  1. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  2. What does a climbing interest rate risk signify about the economy?

    Climbing interest rate risk typically signifies the economy is strong with considerable financial activity. When an economy ... Read Full Answer >>
  3. How can an investor profit from a decline in the real estate sector?

    Speculation enables investors to profit from a decline in the real estate sector. The most popular forms of speculation for ... Read Full Answer >>
  4. How can derivatives be used for speculation?

    Derivative securities could be bought or sold to speculate on the future price of the underlying assets. Derivative securities' ... Read Full Answer >>
  5. What is the difference between a banker's acceptance and a post-dated check?

    Some common financial instruments that speculators use are stocks and financial derivatives. Speculation involves trading ... Read Full Answer >>
  6. What is the difference between speculation and hedging?

    Speculators and hedgers are different terms that describe traders and investors. Speculation involves trying to make a profit ... Read Full Answer >>
  7. How are risk profiles and speculation related?

    Risk profiles must be assessed before engaging in speculation, which involves taking on risk in an investment with an attempt ... Read Full Answer >>
  8. What securities can I use to engage in speculation of an asset while limiting my ...

    If you want to engage in speculation of an asset while limiting your costs, use a derivative security. Since a derivative ... Read Full Answer >>
  9. What is the difference between speculation and gambling?

    Speculation and gambling are two different actions used to increase wealth. However, the two are very different in the world ... Read Full Answer >>
  10. How can an investor make money from a decline in the electronics sector?

    Speculation methods, such as short selling, futures contracts and put options, offer investors a way to make money from a ... Read Full Answer >>
  11. How can an investor profit from a decline in the aerospace sector?

    Several forms of speculation enable investors to profit from a decline in the aerospace sector. Short selling aerospace stock ... Read Full Answer >>
  12. How did Bernard Baruch attain his wealth?

    Bernard Baruch obtained his fortune by investing in profitable stocks on Wall Street. Baruch is known as a legendary stock ... Read Full Answer >>
  13. If I believe Internet sector companies are overvalued, how can I profit from a fall ...

    If you believe Internet sector companies are overvalued, you can profit from a fall in their share prices by engaging in ... Read Full Answer >>
  14. How can I profit from a fall in the metals and mining sector?

    Investors profit from a fall in the metals and mining sector by going short on metals or by going long on broader market ... Read Full Answer >>
  15. What is the logic behind trading securities that exhibit Broadening Formation patterns?

    One of the more volatile and conspicuous patterns that can emerge in a security's price chart is called the broadening formation. ... Read Full Answer >>
  16. What is the difference between investing and speculating?

    The main difference between speculating and investing is the amount of of risk undertaken in the trade. Typically, high-risk ... Read Full Answer >>
  17. 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 Full Answer >>
  18. How do speculators profit from options?

    As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by ... Read Full Answer >>
  19. Who sets the price of commodities?

    Commodities are extremely important as they are essential factors in the production of other goods. A wide of array of commodities ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  2. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  3. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  4. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  5. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  6. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!