DEFINITION of 'Speculative Flow'

Speculative flow is the movement of hot money into shares of a sector or specific company or an asset class in an attempt to earn short-term gains. Speculative flow can be sustained or short-lived, and if large enough, the increased demand will create upward pressure on the price of the securities where the money is flowing.

BREAKING DOWN 'Speculative Flow'

Speculation should not be confused with informed investing. Speculators typically know very little about the fundamentals of a company or a sector, or the underlying drivers of a particular asset class. However, if they believe something will go up, they may place their bets on the object of their adoration. Other like-minded speculators may catch wind of a hot trade and join in, adding to the speculative flow of money into a security — a stock, sector ETF, junk bonds, a foreign currency, cryptocurrency, etc.

Example of Speculative Flow

On any given trading day, there are speculative flows to be found in all corners of the markets. The ones reported in the news happen to be the more interesting cases involving names or asset classes that many people have familiarity with. Take Twitter, for example, which went public in 2013. Shortly after it hit the market, massive speculative flow took the stock from its IPO price of $26 per share to close to $45 by the end of its first trading day. Speculative flows into the stock regularly occur when the rumor mill spins that the company will be bought.

Another example of an asset class that is prone to speculative flow — this one global and gargantuan — is crude oil. When traders expect Middle East tensions to erupt, OPEC to stick together, or supply of oil to otherwise be constrained, they may aggressively buy crude oil futures contracts in an attempt to reap short-term profits from a potential spike in oil prices.

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