What is a Speculator?

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Definition:

A speculator is someone who engages in high-risk investing with the hopes of a significant financial reward.

🤔 Understanding a speculator

A speculator is a high-risk investor who tries to gain significant short-term returns, rather than buying and holding investments with the hopes of a modest long-term return. As a result of the increased risk that speculators tend to take on, they typically expect substantial profits. Speculators often try to make their money by timing markets. They might try to sell their holdings right before a market crash, only to repurchase them at a lower price shortly after. Speculators might also look for an asset or company that has the potential for above-normal growth so that they can try to make a lot of money in a short amount of time.

Example

One of the most famous stock market speculators in history was Jesse Livermore. Livermore began his investing career at the age of 14, when he left home to get a job working for a stockbroker. He began investing on his own and moved to New York to trade stocks full-time when he was 21. Livermore’s speculative career had its ups and downs, leaving him completely broke at times. In his most famous speculative move, Livermore shorted the stock market in 1929, selling $100M worth of stocks just before the market crash.

Takeaway

A speculator is like an extreme sports athlete…

For most people, extreme sports such as free climbing or cliff jumping are a bit too risky. They can be dangerous and may result in serious injuries. But for those who do it and do it well, the rewards can be significant. Similarly, speculators are willing to take on risks that most people won’t in order to see substantial potential returns. But they also run a greater possibility of losing all of their money.

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What is a speculator?

A speculator is someone who accepts a greater level of investment risk in exchange for the possibility of a significant financial return. Speculators generally buy assets for a short period in the hopes of selling them for a profit after a dramatic price increase. They may be active in the stock market and bond market, as well as less traditional investment markets such as trading currencies (forex), cryptocurrencies, and commodities.

How does speculation work?

Speculating involves taking on a high level of risk in exchange for the potential of a large financial return. Unlike traditional buy-and-hold investing, speculators look for assets the prices of which might increase or decrease dramatically in the near future.

Speculators are individuals who engage in high-risk investing in the hopes of making a large profit. And while the principles are generally the same from one speculator to the next, speculation can take many different forms.

First, speculation is common in the stock market. Speculators analyze the performance of various companies and indexes, looking for the potential of a large price movement. Speculators aren’t focused on dividend investing (dividends are a type of payment that corporations give to investors to share the profits). Instead, their goal in stock trading is capital gains, meaning selling the stock for significantly more than they paid for it.

Speculators are also active in the bond market. Within the bond market, there’s a wide array of risk levels. Some bonds, known as investment-grade bonds, are considered fairly low-risk because of their credit rating. These bonds also generally come with a lower interest rate for the investor. Speculators are more likely to buy junk bonds. These bonds, also known as speculative-grade bonds, have a lower credit rating, and therefore more risk. But because of the higher interest rates, they may also result in more money for the speculator.

Speculators also participate in less traditional financial markets, such as the foreign exchange (forex) and commodities markets. The forex market is where investors trade one currency for another in the hopes of making money off the price fluctuations of a particular currency.

The commodities market includes the sale of items such as gold, oil, and agricultural goods. Speculators buy and sell these products in the hopes of making money off dramatic price changes.

Cryptocurrency prices, like stocks and bonds, are based on supply and demand from investors. But cryptocurrencies tend to experience significant volatility and their global markets are often lacking in regulatory oversight creating additional risk for speculators.

Finally, many speculators participate in angel investing and venture capital. This type of investing generally involves buying shares of a private company to help it grow. This tends to carry a higher risk, because the companies are often young and haven’t proven themselves yet. But they can also result in substantial financial returns.

It’s important to note that speculation is an advanced investment strategy and requires significant technical analysis. It’s not an ideal strategy for the average investor. Additionally, while speculators can make a lot of money, they also face the potential of substantial financial losses, sometimes losing more than their initial investment.

What are the principles of speculation?

Though speculation comes in many forms, there are a few key principles involved:

  1. Time horizon: Speculators tend to buy assets to hold for a timeline of less than one year. For speculators engaging in day-trading, this timeline is significantly shorter.
  2. Level of risk: Speculators tend to engage in high-risk investing.
  3. Investor attitude: Speculators are aggressive investors, in that they’re willing to take action to make a lot of money in a short period.
  4. Decision criteria: Because they hope to make a lot of money in a short period, there’s generally a lot of technical analysis that goes into speculators’ investment decisions.

What are the types of speculators?

A speculator is someone who engages in high-risk investing with the hopes of a higher return. While all speculators have the same end-goal of making money, there are a few different types of speculation in which they might engage.

  1. A bull speculator is one who expects the market price of a particular security or asset to increase. These speculators expect the price to increase substantially, so they invest in the hopes that they can sell later for a profit. If the investor is correct and the price rises, they’ll make money. But if the price decreases, they’ll lose part of their initial investment.
  2. A bear speculator is one who expects the market price of a particular security or asset to fall. This speculator sells the securities before the price drops, often with the hopes of repurchasing at a lower price. If the investor is wrong and the price continues to increase rather than decreasing, they may lose out on potential earnings from having sold too early.
  3. A stag speculator, also known as a day trader, is someone who buys stocks with the hopes of selling them right away for a profit. A stag speculator is like a bull speculator, where they expect the price of an asset to increase so they can sell for a profit. But a stag investor speculates with the hopes of selling within a day or so.
  4. A lame-duck speculator is one who’s lost a significant amount of money in the stock market or who’s unable to meet their obligations. The roots of the term lame-duck stem from the stock market, with its use dating back as far as the late 1700s. In more recent years, the term has been used in reference politics rather than investing.

What is the difference between a speculator and an investor?

At first glance, one might think that speculators and investors are one and the same. After all, both are generally market participants who buy an asset with the hope of selling at a higher price. But while there are some similarities, the methods and the end-goal are very different.

Investing generally involves buying an asset and holding it for one year or more. Investors might take on some risk with their investments, but they generally diversify their portfolios with the hopes of hedging some of their risk. Investors put their money into assets such as stocks, bonds, and funds.

Speculators also buy assets in the hopes of earning a profit. But unlike investors, speculators tend to buy assets to hold for shorter periods of time. They buy because they expect the price will swing dramatically.

Unlike investors, speculators tend to specifically focus on higher-risk opportunities where they might make a lot of money, but could also lose a lot of money. In addition to buying different types of securities, speculators also participate in venture capital, options trading, futures contracts, foreign currencies (aka forex), and cryptocurrencies.

What are the effects of speculation on the stock market and the economy?

While speculators are focused on their own financial outcomes, their actions also have an impact on the economy as a whole. Speculators help to create liquidity in the market. Because they’re regularly buying and selling assets, even those that are high risk, they make it easier for other investors to buy and sell when they want.

Because of their willingness to invest in high-risk opportunities, speculators may also help to provide capital for companies that wouldn’t otherwise be able to get it. A start-up that struggles to get your average investor to buy in might be able to get speculators to buy equity.

Despite the positive effects that speculation can have on the economy, it can be problematic as well. For example, speculation can cause asset prices to move artificially.

Suppose there’s a company the stock price of which is fairly low. Speculators may expect the company is going to take off and that its stock prices will rise significantly. To get in on the ground floor and make a lot of money, speculators might buy a lot of stock in this company. The increased volume caused by the speculation drives the stock price up. Then speculators sell their shares for a profit — causing the stock price to drop.

But the price increase was a result of the speculators’ purchases, not necessarily the performance of the company. And the speculators’ sell-off forces the stock price down to the detriment of other long term investors who believed in the performance of the company itself.

In short, the artificial movement caused by speculation can have nothing to do with a company’s performance, creates additional volatility in the marketplace and can adversely affect the holdings of traditional investors.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

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