What is Speculation in Financial Market?
Like Henry Ford said, “Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services.”
Speculation in the market means the act of doing a financial transaction that is associated with a substantial risk of losing money or value but at the same time, it has the capacity to holds the expectation of a significant gain or other major value. The possibility of gain block out the risk of loss in speculation. A substantial profit motivates someone to get engaged in the speculation activity. A speculator is an investor who is engaged in speculation. In the stock market, speculative stocks are those stocks that involve high risk.
Speculators are prevalent in the markets where price movements of securities are highly frequent and volatile.
The speculators usually inject liquidity into the market by taking heavy risk factor and no normal investors do this.
Speculative stocks are those stocks that involve a high burden of risk. But at the same time, they have the potential of high profit compared to the risk factor.
Trading in derivatives like futures and option is an example of speculation trading. Speculators trade in derivatives for short term profits and this trading has limited validity. Trading in penny stocks with high volatility is another example of speculation trading. Speculators who trade in derivatives, square off their position before the expiring date. Speculators inject liquidity into the market.
They keep the market alive and make it easy for the trading between buyers and sellers. Speculators also supply the capital to small companies and help them to grow and expand in the market.