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Sometimes speculative purchasing can cause particular prices to rise above their "true worth" simply because the speculative purchasing is artificially increasing the demand. Speculative selling can also cause prices to fall below "true value" in a similar fashion. In some situations price rises due to speculative purchasing cause further speculative purchasing in the hope that the price will continue to rise. This creates a positive feedback loop in which prices rise dramatically above the underlying "value" or "worth" of the items. This is known as an economic bubble (or sometimes a speculative bubble). Such a period of increasing speculative purchasing is very often followed by one of speculative selling in which the price falls in a crash (see Stock market crash). This is often even more dramatic than the period of rising prices.
Speculators are comically pictured as speculating in pork bellies (in which a real market and real speculators exist) and such and often losing their shirts or making a fortune upon small market changes. Speculation exists especially in futures and other derivatives which involve leverage that can transform a small market movement into a huge gain or loss.
Most non-professional traders lose money on speculation, those that do make money tend to become professional. Occasionally some dramatic event will occur such as the effort of the Hunts to corner the silver market or the currency speculations of George SorosGeorge Soros (born August 12, 1930) is a Hungarian-born American businessman. He is famous as a currency speculator and a philanthropist. Currently, he is the chairman of Soros Fund Management and the Open Society Institute and is also director of the Cou.
The role of speculators in a market economy are to absorb riskThis article is about the concept of risk. There is also a popular board game named Risk, and an album by Megadeth named Risk. Risk is the potential harm that may arise from some present process or from some future event. It is often mapped to the probabi and to provide liquidity in the marketplace for the chance of monetary reward. For example, if there were no speculators in a certain market, say in pork bellies, the only participants in that market would be the producers (pig farmers) and consumers (pork dealers). With fewer players in the market, there would be a larger spread between the current bid and ask price of pork bellies. Any new entrant in the market who wants to either buy or sell pork bellies will be forced to accept an illiquid market and market prices that have a large bid-ask spread. Another example of the value of speculators is the ability of a pig farmer to sell his pork on the futures market at a known price ahead of its production.
Speculators provide trading volume and liquidity. In exchange for the potential for great reward, speculators carry a significant proportion of the risk in any market.
Many "investors" in the stock market are actually speculators betting on a gain in price "buy low sell high".
See also: Equity investmentEquity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises. It also sometimes refers to the acquisiti, InvestmentInvestment is a term with several closely related meanings in finance and economics. It refers to the accumulation of some kind of asset in hopes of getting a future return from it. In theoretical economics, investment means the purchase (and thus the pro, Financial marketThe financial markets are markets which facilitate the raising of funds or the investment of assets, depending on viewpoint. They also facilitate handling of various risks. The financial markets can be divided into different subtypes: Capital markets conss, Behavioral financeNobel' Prize in Economics winner, Daniel Kahneman, was an important figure in the development of behavioral finance and economics and continues to write extensively in the field. Behavioral finance and behavioral economics are closely related fields which, Stock market bubbleA Stock market bubble is a type of economic bubble in which an exaggerated bull market where the value of stocks listed on a stock exchange rise dramatically upon a wave of public enthusiasm. The dot-com boom of the late 1990s is one example. The biotech, Tobin tax, Tulipomania
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