Speculation

Speculation is trading with a value loss risk or a chance of greater profit. In speculation, the risk of loss is greater than compensation by the possibility of large profits or other rewards.

An investor who makes a speculative investment is guided by price fluctuations. The risk in such investments is very high, but the possible profits from such investments are also much higher. The investor is tracking the market value of these investments, rather than investing for the long term. The purchase of foreign currency can be considered as the most common speculative investment. An investor buys foreign currency to sell at a higher rate later. But also, there are some investors, who buy foreign currency to pay for imports or to finance foreign investments.

Speculative investors exist because of the possibility of large profits. Sometimes it is very difficult to differentiate speculation from simple investing. You have to pay attention to several factors: the nature of the asset, the expected holding period and/or the amount of leverage applied to the risk.

How does Speculation work

In real estate, it is most difficult to differentiate investments and speculations when renting out a place. Buying several apartments with a minimum down payment to rent out can be considered as an investment, and to resell quickly can be considered as a speculation.

Producers can effectively hedge price risk through speculators, who can provide market liquidity and reduce the spread between supply and demand. Also, short speculation can hold back the bull run and stop asset price bubbles forming, creating a counterbalance to a successful outcome.

Mutual and hedge funds often speculate in the currency, stock and bond markets.

Speculation and the Forex Market

The Forex Market has the highest total volume and value in U.S. dollars in the world. This market is traded worldwide 24 hours a day. Modern high-speed electronic trading platforms allow to make rate decisions in seconds.

The players of this market are very big. Usually, they are asset managers and hedge funds with multi-billion-dollar portfolios. Speculation at this level is difficult to differentiate from hedging. A company may buy or sell a currency to avoid changes in the market. Spot trades in currency pairs are made for delivery through options or a simple exchange.

For example, there is a need to sell foreign currency to buy a bond. This can be both hedging the value of the bond and speculation. Determination can be complicated by multiple buying and selling if the fund has an underlying bond.

Speculation and the bond market

The global asset market is valued at more than $100 trillion, the U.S. owns about $40 trillion of them. These assets can cover lends issued by governments and multinational corporations.

Political and economic conditions around the world and changes in interest rates greatly affect asset prices. The U.S. treasury bonds are traded in the world's largest markets. Their prices are often dependent on speculation.