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What is a 'Speculator'

A speculator is a person who trades derivatives, commodities, bonds, equities or currencies with a higher than average risk in return for a higher-than-average profit potential. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains.

Speculators are typically sophisticated risk-taking investors with expertise in the markets in which they are trading; they usually use highly leveraged investments, such as futures and options.

BREAKING DOWN 'Speculator'

These investors are call speculators due to their tendency to attempt to predict price changes in more volatile sections of the markets, believing, or speculating, that a high profit will occur even if market indicators may suggest otherwise. Normally, speculators operate in a shorter time frame than a traditional investor.

Principles behind Speculation

While any belief that directs an investment strategy may be considered speculative, it is less so if the market supports the idea. Speculative activities generally carry a higher amount of risk, often because various market indicators do not support the likelihood of asset appreciation. Speculators are also more likely to purchase futures or options over traditional stocks.

Examples of Speculation in the Market

An investor is speculating if he believes that a company that has recently seen a dramatic downturn, such as a highly negative press event or even a bankruptcy, will make a quick recovery. The investor's subsequent investment in that company makes him a speculator.

Speculators' Impact on the Market

If a speculator believes that a particular asset is going to increase in value, he may choose to purchase as much of the asset as possible. This activity, based on the perceived increase in demand, drives up the price of the particular asset. If this activity is seen across the market as a positive sign, it may cause other investors to purchase the asset as well, further elevating the price. This can result in a speculative bubble, where the speculator activity has driven the price of an asset above its true value.

The same can be seen in reverse. If a speculator believes a downward trend is on the horizon or that an asset is currently overpriced, he sells as much of the asset as possible while prices are higher. This act begins to lower the sale price of the asset. If other investors act similarly, the price will continue to fall, resulting of a burst of any speculative bubble that may be in play until the activity in the market stabilizes.