Loading the player...

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.

RELATED TERMS
  1. Speculative Flow

    Speculative flow is the movement of hot money into shares of ...
  2. Speculative Stock

    A speculative stock is a stock with a high degree of risk, such ...
  3. Speculative Capital

    The funds earmarked by an investor for the sole purpose of speculation. ...
  4. Speculation Index

    An index that is derived from the ratio of trading volumes on ...
  5. Dual Currency Service

    A forex trading service that allows an investor to speculate ...
  6. Volatility Swap

    A forward contract whose underlying is the volatility of a given ...
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. Investing

    Speculating With Exchange Traded Funds

    More and more investors have been drawn to the often volatile ETFs. Learn how you can use this instrument for big returns.
  3. Investing

    Stock Basics Tutorial

    If you're new to the stock market and want the basics, this is the tutorial for you!
  4. 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.
  5. Trading

    Tips for Getting Into Futures Trading

    The futures markets can seem daunting, but these explanations and strategies will help.
  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. Managing Wealth

    Put Option Basics

    Put option allow investors to hedge an investment they own or speculate in an investment they don't own. Find out more about this type of option and how it can work in an investor's favor.
  8. Investing

    Why Housing Market Bubbles Pop

    Home price appreciation is not assured. Can you withstand the volatility in this market?
  9. Trading

    Advantages Of Trading Futures Over Stocks (APPL)

    We look at the top eight advantages of trading futures over stocks.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center