Speculation

Sponsorship the way you would do it

Speculation is the buying, holding, and selling of stocks, commodities, collectibles, real estate, or any valuable thing to profit from fluctuations in its price as opposed to buying it for use or for income - dividends, rent etc. Speculation is one of three market roles in western financial markets, distinct from hedging and arbitrage.

Sometimes speculative purchasing can cause particular prices to rise above their "true worth" simply because the speculative purchasing is artificially increasing the demand. Speculative selling can also cause prices to fall below "true value" in a similar fashion. In some situations price rises due to speculative purchasing cause further speculative purchasing in the hope that the price will continue to rise. This creates a positive feedback loop in which prices rise dramatically above the underlying "value" or "worth" of the items. This is known as an economic bubble (or sometimes a speculative bubble). Such a period of increasing speculative purchasing is very often followed by one of speculative selling in which the price falls in a crash (see Stock market crash). This is often even more dramatic than the period of rising prices.

Speculators are comically pictured as speculating in pork bellies (in which a real market and real speculators exist) and such and often losing their shirts or making a fortune upon small market changes. Speculation exists especially in futures which involve leverage that can transform a small market movement into a huge gain or loss.

Most non-professional traders lose money on speculation, those that do make money tend to become professional. Occasionally some dramatic event will occur such as the effort of the Hunts to corner the silver market or the currency speculations of George Soros.

The role of speculators in a market economy are to absorb risk and to provide liquidity in the marketplace for the chance of monetary reward. For example, if there were no speculators in a certain market, say in pork bellies, the only participants in that market would be the producers (pig farmers) and consumers (pork dealers). With fewer players in the market, there would be a larger spread between the current bid and ask price of pork bellies. Any new entrant in the market who wants to either buy or sell pork bellies will be forced to accept an illiquid market and market prices that have a large bid-ask spread. Speculators provide trading volume and liquidity. In exchange for the potential for great reward, speculators carry a significant proportion of the risk in any market.

Many "investors" in the stock market are actually speculators betting on a gain in price "buy low sell high". Many companies implicitly participate by not paying dividends. There exist companies where the main goal of their managements appears to be increasing the stock price rather than making a profit.