Speculative Risk

What is 'Speculative Risk'

Speculative risk is a category of risk that, when undertaken, results in an uncertain degree of gain or loss. All speculative risks are made as conscious choices and are not just a result of uncontrollable circumstances. Speculative risk is the opposite of pure risk.

Almost all investment activities involve speculative risks, as an investor has no idea whether an investment will be a blazing success or an utter failure.

BREAKING DOWN 'Speculative Risk'

Some investments are more speculative than others. For example, investing in government bonds has much less speculative risk than investing in junk bonds, because government bonds have a much lower risk of default.

A speculative risk has the potential to result in a gain or a loss. In comparison, a pure risk will only result in loss. Speculative risk requires input from the person looking to take it on and therefore is entirely voluntary in nature. Any investment may be seen as speculative, as most investors will not take on investments that are known to result in losses.

The result of a speculative risk is hard to anticipate, as the exact amount of gain or loss is unknown. Instead, various factors, such as company history and market trends, are used to estimate the potential for gain or loss. Often, these risks may be deemed uninsurable as there is not concrete way to predict the outcome.

Examples of Speculative Risk

Most financial investments, such as the purchase of stock shares, involve speculative risk. It is possible for the shares value to go up, resulting in gain, or go down, resulting in loss. While data may allow certain assumptions to be made regarding the likelihood of a particular outcome, the outcome is not guaranteed.

Sports betting also qualifies as having speculative risk. If a person is looking to bet on which team will win a football game, the outcome could result in a gain or loss depending on which team wins. While the outcome cannot be known ahead of time, it is known that a gain or loss are both possible.

Comparison to Pure Risk

In contrast, pure risk involves situations where the only outcome is loss. Generally, these sorts of risks are not voluntarily taken on and, instead, are often out of the control of the investor. Pure risk is most commonly used in the assessment of insurance needs. Should a person damage a car in an accident, there is no chance that the result of this will be a gain. Since the outcome of that event can only result in loss, it is a pure risk.

RELATED TERMS
  1. Pure Risk

    A category of risk in which loss is the only possible outcome; ...
  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. Speculator

    A person who trades derivatives, commodities, bonds, equities ...
  5. Speculative Flow

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

    The funds earmarked by an investor for the sole purpose of speculation. ...
Related Articles
  1. 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.
  2. 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.
  3. Managing Wealth

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  4. Managing Wealth

    Risk and Diversification: Different Types of Risk

    Let's take a look at the two basic types of risk: Systematic Risk - Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the ...
  5. Financial Advisor

    Why Companies Need Risk Management

    Implementing risk management strategies can save an entire organization from failure. Is yours up to snuff?
  6. Managing Wealth

    How to Invest In Developing Markets

    Developing markets can be attractive additions to many investor's portfolios, but carry additional risks that must be considered.
  7. Managing Wealth

    Understanding Market Risk

    Market risk is the chance that an investment’s value will decrease due to a factor that affects all investments across the market.
  8. Trading

    5 Common Mistakes Young Investors Make

    Starting to invest can be a scary process. Luckily, steering clear of common errors is half the battle.
  9. Managing Wealth

    Risk and Diversification: What Is Risk?

    Whether it is investing, driving, or just walking down the street, everyone exposes themselves to risk. Your personality and lifestyle play a big role in how much risk you are comfortably able ...
  10. Managing Wealth

    What is Risk Management?

    Risk management is the process of assessing, managing and also mitigating losses. For investors, risk management is where an investor assesses the potential for loss in an investment, or portfolio ...
RELATED FAQS
  1. What is the difference between investing and speculating?

  2. How are risk profiles and speculation related?

    Learn more about risk profiles and speculation, why speculators should assess their risk profiles and how risk profiles and ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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. European Union - EU

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

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. 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 ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center