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.

  1. Speculator

    A person who trades derivatives, commodities, bonds, equities ...
  2. Speculative Risk

    A category of risk that, when undertaken, results in an uncertain ...
  3. Volatility Swap

    Volatility swaps are forward contracts with a payoff based on ...
  4. Capital Flows

    Capital flows entail the path that money travels through corporations, ...
  5. Risk Capital

    Risk capital consists of investment funds allocated to speculative ...
  6. Asset Valuation

    A method of assessing the worth of a company, real property, ...
Related Articles
  1. Investing

    Market Speculators: More Help Than Harm?

    Speculators often get a bad rap, but remember that they only observe trends, not manipulate them.
  2. Trading

    Derivatives 101

    A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the asset’s price movement with another party.
  3. Investing

    How Speculation Drives Investment in Arena Pharmaceuticals (ARNA)

    Find out the reasons why biotech firm Arena Pharmaceuticals is a speculative play and how speculators are driving investment in its stock.
  4. Investing

    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.
  5. Investing

    Taking Advantage Of Central Bank Interventions

    These interventions provide great opportunities for investors and traders to seize entries into longer-term trends.
  6. 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.
  7. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  8. Investing

    Corporate cash flow: Understanding the essentials

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
  9. Investing

    Trading gold and silver futures contracts

    Gold and silver futures contracts offer a world of profit-making opportunities for those interested in hedging securities or a speculative plays.
  1. What is the difference between hedging and speculation?

    Hedging and speculation are very different in purpose, function and risk profile. Find out how and why investors use both. Read Answer >>
  2. Why do companies enter into futures contracts?

    Learn how companies use futures contracts for the purposes of hedging their exposure to price fluctuations as well as for ... Read Answer >>
  3. What is the difference between arbitrage and speculation?

    Arbitrage and speculation are very different strategies. Arbitrage involves the simultaneous buying and selling of an asset ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center