Stock market Investment speculation

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Stock market speculation in simple words means predicting the price of a market entity (A Stock for example) in future. If the speculation is positive, we buy. If our speculation is negative, we don't buy or sell .Buy low sell high. Speculation is the activity of Speculators. The activity of the speculators leads to taking position in the stock market for a short period of time. The term “speculation” contracts with the term “investment”. Investment refers to the buying of a financial product or any valued item with an anticipation that positive returns will be received in the future.

The distinction between investment and speculation has long been a debate and may well continue so in the future. A speculator is defined by his readiness to pursue short-term opportunities for profit: his investments are fluid where as those of the conventional business man are more or less fixed. “The activity of forecasting the prospective yield of assets over their whole life”, in contrast to speculation, it is called “the activity if forecasting the psychology if the market”. Speculation has come to mean different things to different people, yet still retains something of its original meaning: namely, to reflect or theorize without a factual basis.

The investment is based on valuation of business by speculation rests completely on the price. An investor’s expectation is also an important factor in differentiating between investment and speculation. High expectations are speculative in nature. Investment is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market. A sound investment will involve understanding and analysing the business where as the speculative activity will involve buying based on tips, rumors or the next big thing.

Traditionally, investment is distinguished from speculation with respect to the following factors:

1.       Risk

Investors also invest money in speculative investment. In a sense speculation is also part of investment. But there are distinct differences between investment and speculation. Investment generally means placing money in various financial vehicles or assets with the intention of getting returns when sold at a time these financial vehicles or assets are priced higher than when bought. The investment tends to be speculative investment when the investor doesn't make advocate analysis, or when the financial vehicle in which investment is made poses a high risk and its safety is low or it may even be that the risk involved could extend to even the loss of the amount invested.

2.       Price Change

Expectation that the price of the asset will increase in the future is the speculator invests. Economic, environmental, social and political factors also can influence the price. Even rumours cause the price to fluctuate. The factors that led to the fluctuation may not even be directly connected to the asset. For instance, the prospects of a government falling may cause market fluctuation even before anything has happened to the government. Investment in gold and oil by its very nature are speculative. Sometimes, investors buy an asset with the intention of short selling, the investment is then speculative. Speculative investment is when investor’s hold, buy, sell and short sell stocks, bonds, commodities, currencies, derivatives, real estate, collectibles and other valuable financial assets with the sole idea of making profits from the fluctuations in price rather than its real value.

3.       Holding Period

The way we can distinguish an investment from speculation is by the holding times. The speculator’s holding time is typically short. Of course, there is an element of speculation in all investments but it is not the main intention of investment to qualify as an investment, a purchase must be:

1.      Based on thorough analysis, Promise

2.       Safety of principal and

3.       A satisfactory return.

Any purchase not meeting the requirements is speculation.