Definition of Speculation
Speculation is the practice that involves the risky financial transactions with the intention of profit on a tradable good like financial instrument from fluctuations in the market value. It is seen that many speculation pay limited attention to the fundamental value of a security rather than shifting its focus purely on price movements. Speculations are widely used in the terms of bonds, stocks, commodity futures, derivatives, fine art, collectibles, currencies and real estate.
Speculation plays one of the four roles in the financial market, after speculating the level of risk gets higher than the chances of acquiring huge gains, otherwise there would fewer possibilities of speculation. The process is often misjudged with gambling, and the main difference is that the speculation is equal to taking a calculative risk not purely depending on the chances, whereas gambling totally depends on the random chances.
Books on Speculation
Arbitrage, Hedging, and Speculation: The Foreign Exchange Market By Ephraim Clark, Dilip Kumar Ghosh (published by Greenwood Publishing Group, 2004)
Speculations on Speculation: Theories of Science Fiction By James E. Gunn, Matthew Candelaria (published by Scarecrow Press, 2005)
How Speculation works?
It gets difficult to understand the distinctive nature of speculation and investments, there are a number of factors that decided what should be called as speculation and investments, are follows as, including the nature of the asset, the expected duration of the holding period, and the amount of leverage.
- Suppose a person has bought an addition property (additional to his principle residence) with the intention of renting it out, this action would be considered as investment, but when he buys half a dozen condominiums with minimal down payments with the objective that he would ‘Condo-flipping’, this activity of his would be considered as definite speculation.
- Let’s say, a speculator believes that the stocks of ABC Company are overpriced they may short the stock, and wait for the price to decline in order to make profits, it is easy for a virtual speculations on every security as the core of speculation is in the commodities, futures, and derivatives markets.
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