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.

INVESTOPEDIA EXPLAINS '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.

VIDEO

Loading the player...
RELATED TERMS
  1. Take A Flier

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

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

    Money provided by investors to startup firms and small businesses ...
  4. Speculation Index

    An index that is derived from the ratio of trading volumes on ...
  5. Speculator

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

    Making an investment to reduce the risk of adverse price movements ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
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

    How To Start A Hedge Fund In Canada

    Would-be hedge fund managers in Canada need to understand the laws and regulations that must be followed in order to start a fund in the country.
  9. Options & Futures

    Was Buffet Right about Derivatives as WMDs?

    Why Warren Buffet described derivatives as weapons of mass destruction, and when can they be helpful or harmful?
  10. Stock Analysis

    Will Macau's Plunge Crush Melco Crown For Good?

    Melco Crown Entertainment has gotten all of its revenue and earnings from Macau, the Asian gaming capital, which stocks have lost half its value recently.

You May Also Like

Hot Definitions
  1. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  2. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  3. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  4. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  5. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  6. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
Trading Center