Speculation
Speculation is an act of trading in shares (Buying or selling) in stock markets where the investor expects substantial gain, but also runs a risk of losing his money. When he foresees a lot of profit in a certain transaction, he accepts the risk of incurring a loss in it, in case the transaction does not yield the results he had anticipated. His motivation is to make enormous profit and is ever vigilant in order to grab the opportunity by calculating his risks and profits.
For example an investor thinks that ICICI Bank shares are overpriced. He immediately turns to futures and short his position. Then, he waits for the price to fall. And when that happens, he gains profit by selling those shares for higher price than the current spot price.
Main features:
- Profit increases with risk
- It is a method of short term investment.
- Investors study the trend and bet in the direction the stock’s price will move
- Most commonly done in the commodities, futures and derivative markets.
- It may increase short-term volatility and can inflate prices in the share market.
Qualities of a good speculator
Knowledge
A fair knowledge of the share market and its instruments is the key to success. Speculation is normally high when markets are rallying, as there is a lot of instability in stock prices every now and then. This does not mean that speculation is not possible in bearish markets, but it requires a lot of patience.
Self-Reliance and confidence
An investor must think for himself and move with confidence. With the acquired knowledge and the opinion of the experts, he gets a fair idea. But ultimately, it’s the investor who takes the judgment call. If once the outcome of his decision had brought losses, does not mean that share markets are wrong place to be. The confidence to take up premeditated risks is required. After all, you can make huge profits as well.
Judgment
Whether the markets are bullish or bearish, a speculator has to find answers to questions like “Which instrument will help me make more profit?” , “What should be my strike price for this stock?”, “What should be the best exit time?”, etc. His profits and losses depend on his judgment.
Prudence
A speculator must always be vigilant and move with cautiousness. The markets could be highly impulsive. A speculator has to calculate his risks and profits. A betting game might lead to huge losses. It is good to remember that in share markets, one person’s profit is other’s loss.
Pliability
The flexibility and the power of revision is what matters. An act (E.g. Long or Short) once done cannot be necessarily reverted. Therefore the decision to take up the risk must be calculated. Continuous observation and changing one’s opinion according to the market is indispensable.
Some speculators use derivative instruments as an instrument to reduce risk. But all instruments have their own benefits and risks as well. It is always better to consult experts or firms in case of inexperienced investors who wish to make huge profits from the fluctuations in the market.
From what I have understood, speculation works in tandem with market timing of Indian stock markets (http://www.keralabanking.com/market-timing-of-indian-stock-markets-2/) of share buying process. But I would like to clarify the exact difference between them. As per my knowledge, timing has particular logic and it is the experience and judgement which solely matters. Does the same hold true for speculation as well? Also are there any well written references which talks more about speculation? In Mumbai, as per my knowledge the best speculator is Rakesh Jhunjhunwala, is that correct?
Very truly said ‘one person’s profit is another person’s loss’. Profit and loss are two sides of same coin. But one cannot earn profit without taking risk and if one is taking risk, they have to be prepared for the loss too. Speculating is easy but its the extensive research before speculating is what matters. Once you are a proficient at it, speculating profit/loss and earning profit will be a matter of a split second.
Speculation, as the name suggests, means assuming the rise and fall in the stock prices and investing accordingly. In short, it means assumption of stock prices. Speculation involves a lot of risk since it is purely based on assumptions and does always have an underlying asset to protect from price fluctuations. The trader needs to be highly knowledgeable and experienced if he has to enter into speculative trading. The risk should be properly calculated to prevent any mishaps. Risk is directly proportional to speculation, which means ‘higher the risk higher the returns and lower the risk, lower the returns’.
In a layman’s language, Speculation is the practice of engaging in risky financial transactions in an attempt to profit from fluctuations in the market value of a tradable good such as a financial instrument, rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, interest, or dividends. From what i have understood, one should consult experts or firms in case of inexperienced investors who wish to make huge profits from the fluctuations in the market.