Speculation

Reviewed by Bhavana | Updated on Aug 27, 2020

Definition of Speculation

In the world of finance, betting, or speculative trading, speculation refers to the act of carrying out a financial transaction that has a considerable risk of losing value but also retains the expectation of a significant gain or other big interest. For optimism, the risk of loss is more than offset by the prospect of a significant gain or other rewards. ​ An investor choosing a speculative investment is likely to pay attention to price fluctuations. While risk concerned with an investment is high, usually the investor is more concerned with making a return for that investment based on changes in market value than with long-term investment.

If speculative investment comprises the purchase of foreign currency, then it is termed as currency speculation. In such a scenario, an investor buys currency in an effort to sell that currency at an appreciated rate later on, as opposed to an investor buying a currency for financing a foreign investment or in order to pay for an import. ​ There would be little encouragement to get involved in speculation, without the prospect of substantial gains. Differentiating between speculation and simple investment can sometimes be difficult. It requires the market player to determine whether speculation or investment depends on variables that quantify the value of the asset, the estimated length of the holding period and/or the amount of leverage added to the exposure. ​

How Does Speculative Trading Function?

Mutual funds and hedge funds frequently engage in foreign-exchange speculation, as well as bond and stock markets. ​ For example, when buying a property with the intent to rent it out, real estate may blur the line between investment and speculation. While this would qualify as an investment, buying multiple condominiums with low down payments for the intent of quickly reselling them to a profit would certainly be called speculation.