Financial Speculation

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Financial Speculation

June 3rd, 2010 · Dallas TX, USA -

Financial Speculation can be defined as a financial transaction that aims at considerable profit accompanied by high risk. Speculation is a process of making more profit by taking large exposure of risk in the price fluctuation. This involves buying and selling of financial instrument and make money from the anticipated price fluctuation. In other words, taking large risk to gain money by predicting future prices.

Hedge, Arbitrage and Speculation
These three terms are not similar to each other. Trading of similar securities in two different markets simultaneously is known as Arbitraging. Hedging means protecting from monetary loss by minimizing the risk. Speculation is an action involving high risk and high return.

Speculation in Stock Market
Speculation is commonly used in the stock market. Many investors who tend to make money by speculating are known as speculators. This kind of action persists in the stock market due to different investors have different views about the same stock. Speculation can only exist if there is a variation in the price or the price is very volatile. Volume also plays a vital role in price creation. If there is a selling pressure the price tends to fall and vice versa in buying scenario. Speculation increases the consumption level in the stock market by pumping cash. The speculators bring liquidity in the market.

The major drawback with speculation is that it can emphasize sharp movements. Speculation causes deviation of price form the their intrinsic value. Excessive of buying followed by selling pressures might lead to extreme downside of a particular stock.

Tags: Investment