What is Speculation

Key takeaways

• Speculation is an act of buying and selling assets that have a substantial risk of losing value but also hold the expectation of a significant gain.

• Speculators use various trading strategies, including fundamental analysis and data analysis of different charts.

• Speculators may increase market liquidity and spark trading enthusiasm.

The term "speculation" is often given a negative connotation. Some believe that speculation is equivalent to illegal acts in the capital market, including manipulating stock prices, monopolizing, and insider trading.

Such belief is a complete misunderstanding of speculation, as the concept itself is neutral and does not have any positive or negative meaning.

Speculation and speculators

Speculation is an act of buying and selling assets, and a speculator is someone willing to take on higher risks in the hope of greater gains.

Speculators buy a target asset, hoping to sell it for a profit after a significant price increase within a relatively short period of time.

Speculative trading can play an active role not only in the stock and bond markets, but also in non-traditional investments such as foreign exchange trading, cryptocurrencies, and commodities.

In the securities market, speculation refers to the act of market participants wishing to gain by buying low and selling high based on their prediction of what future prices might be. Their estimates are generally based on fundamental analysis and technical analysis of market fluctuations.

Since there is considerable uncertainty about future price development, speculators may either profit in trading due to correct judgment or lose due to misjudgment.

Speculation can be risky in an uncertain investment environment, and speculators are courageous and active market participants.

Speculation is not that simple

The pattern of speculative trading, or speculative strategies, is seemingly simple: buy low and sell high. Therefore, many people may mistakenly believe that speculation is fairly simple and is just a gamble.

In fact, behind the simple act of speculation, there is a very sophisticated and complex analysis processes.

A study by the North American Securities Administrators Association (NASAA) shows that only 30% of speculators involved in day trading are profitable, and only 12% have the potential for long-term profitability. (Douglas James Jordan. "Cut your losses and let your profits run: An investigation into the disposition effect and the profitability of day trading." The University of Texas at Arlington, 2001.)

Generally, speculators use various trading strategies, such as matched trading, swing trading, and hedging, fundamental analysis and chart data analysis, and attempt to quickly identify overvalued or undervalued companies.

In addition, speculators tend to have a keen sense of what opportunities major global events may bring. For example, the Russia-Ukraine war, US interest rate hikes, and the Covid-19 pandemic may present speculative opportunities.

Impact of Speculation

The greatest impact speculators bring on economic activity is the increased volume of activity in the market. In other words, they increase market liquidity.

Speculators engage in speculative trading wiht the goal to gain, but their high-frequency operations in a short timeframe may also impact the overall market. Speculators help create liquidity, stimulate trading enthusiasm, and may increase other investors' appetite for the overall market, even for risky assets.

For example, many startups are likely to lack long-term capital support from so-called value investing. Still, as some speculators are willing to invest in risky assets, small startups with no easy access to capital may thereby gain financial support in this manner.

Likewise, speculative activity may cause investors to misjudge the value of companies in specific segments. For example, in the heated concept of MEME stock, the stock price can skyrocket due to short-term speculation, while the company's earnings growth may not support such a rise in share prices. Therefore, as speculators sell their shares, it may harm the interests of some long-term investors and even reduce the company's reputation.