What is Speculation?

There are two main ways to participate in the stock market. Either you can invest in stocks or do speculative trades. These two concepts have very different logics. Speculative trading, also known as speculation, is the more popular of these two concepts and accounts for a significant portion of daily trading volume on stock exchanges around the world and India. Let's examine this unique concept in detail and find out how speculation in trading affects investors.

What is speculation?

Speculation is a financial term that describes an activity in which you purchase or sell assets with a predetermined idea or hope regarding its future price movements. Let's take, for example, the case where you buy mangoes now and expect a price rise a few days later. This type of activity is known in finance as speculation.

What is speculative trade?

Speculation in trading is a common strategy used by many stock market participants. The term speculative trading is used to describe high-risk trades you make in the hope of making a large profit.

Speculative trading can be very risky. You could lose a lot of your capital if the trade does not go as you expected. However, you have a good chance of earning significant returns. This makes trading such high-risk, high-return activities more attractive.

Most people involved in speculative trade are more concerned about the price movements of assets than their fundamentals like intrinsic value or dividends. Because such trading activities are focused on short-term gains, and not long-term wealth generation,

Trading within the derivative segment, such as options and futures, is an example of speculative trade. It involves buying or selling futures and options in anticipation of future price movements. These instruments are not valid for long periods of time and can only provide short-term gains to traders. Individuals who are involved in the speculative trading derivative contracts of assets tend to sell their positions before they expire.

Speculative Trading An example

Let's look at an example to understand speculation in trading. We will stick to the futures segment and the derivatives segment.

Let's say that Reliance Industries shares are currently trading at Rs. 2000 The stock price should move around Rs. In three months, the stock price could rise to Rs.2,500. It is impossible to predict how stock prices will move, so you don't know if they will go up.

You decide to use the futures contracts from Reliance Industries in such a scenario to execute a speculative trading transaction. So, you buy a futures contract from Reliance Industries with a strike price Rs. You pay 2,500 and the expiry date is three months away. Your intention is to not hold the contract until expiry in order to receive the shares. Profit from the stock's short-term price movements.

Two months later, the stock price has risen to Rs. You were right. The stock price has risen to Rs. 2,400. You now realize that your goal is to profit only from short-term price movements and decide to sell the futures contract to make a nice lump sum profit, without waiting for the expiry.

This is what experts in finance and stock markets call speculation in trading.

Conclusion

Speculation in trading is not limited to the stock market. It can also be found in other financial markets. Two other markets that are prone to speculative trading include commodities and currencies. A word of caution. Although speculative trade may seem attractive to make profits, it can be extremely risky. Because of the risk of losing large amounts of your investment if the market does not move in accordance with expectations, this activity is best for high-risk individuals who are very cautious.