Speculative Investment- Explanation and example

August 9, 2021

A Speculative Investment is considered high risk, where the buyer is focused on price fluctuations. To profit from market liquidity price fluctuations, the investor purchases the tradable product (financial instrument).
Someone who makes speculative investments is called a “speculative investor” or a Speculator. The fundamental value of a security is less critical to the investor than price movements. Investors don’t care about how much the asset will bring in annual income, such as dividends and interest payments. It is only essential to know how much the investor can sell it at a later date.

Speculative investment may be made in stocks, forex markets, currencies, or financial markets for real estate.
The stock ticker machine was invented in the year 1867, this meant that traders could no longer be present on the stock market exchange floor. Stock speculation exploded from then until the end of the 1920s. The United States had 4.4 billion shareholders as of 1900. In 1932, this number rose to 26 billion.

Are speculative investments bad?

Speculative investments don’t necessarily have to be good or bad. The soundness of the reasoning behind the mass speculation is what will influence them. “I believe that the price of XYZ Company is going to rise because Mercury is retrograde” is speculation without any basis in facts. However, ” I believe that the price of XYZ Company is going to rise because of its debt restructuring efforts” is speculation rooted in a sound thesis.

It comes down to correlation versus causation. However, the price of XYZ Company may rise when Mercury is retrograde. This is called correlation. It’s called causation if the cost of debt restructuring causes it to grow. Even if the outcome is not good – XYZ Company’s share prices fall – it doesn’t matter if the reasoning was solidly rooted within causation factors.

Should You Speculate?

There are many unknowns and uncertainties in investing. Speculative investing is part of the overall investment process. Is it a speculative investment that doesn’t have some risk and return? Investors should know how much they are speculating and whether their investment thesis is based on correlation or causation. Investments are more effective if there is more causation: the more correlation, the more speculative.

Any investor can benefit from healthy speculation. Be aware of your risk tolerance, and don’t overextend it. Pay attention to technical signs and listen to your gut. Don’t let any speculative investment, good or not, be your guide for investing decisions. You’ll learn as you go, and you’ll be speculating less while investing more confidently.

Speculative investment vs an investment

Investment refers to the application of resources (money) to make more money, the availability of funds for investment, or buying goods that are not consumed today but are used to create future wealth.

Investing can provide both income and growth due to the compounding effect. P2P lending is a great example. In exchange for interest payments, investors lend money to borrowers. Lenders reinvest their returns which leads to the exponential growth of their investments. The term P2P stands for Peer-to-Peer.
Experts agree that speculative investments are higher-risk investments.

The definitions of speculative investment vary widely between academics, lawmakers, and also pundits.
The US Commodity Futures Trading Commission defines a speculator in commodity futures as:
“A trader who doesn’t hedge but trades to make profits by anticipating price risk.”
Simply put, speculative investments are about growth, while investment is about income plus growing.

A speculative-grade bond is defined by Moody’s as one with a Ba or lower rating, a BB or lower by Standard & Poor’s, or an unrated bond. We call high-yield, high-risk bonds junk bonds.

Example of a speculative investment

Imagine that you live in Malaysia. Its currency is the Malan. One US dollar is equal to 100 malans.
Malaysia’s primary export is oil. Oil accounts for more than 90% of Malaysia’s hard currency earnings. A hard currency is one that people trust and expect to maintain its extreme asset valuations, such as the US dollar, British pound sterling, euro, Swiss franc, and Japanese yen.

According to most world experts, the price of crude oil will fall by more than 60% in the next two months. It is expected that it will remain low for at least the next two years.
This will cause a significant devaluation of your Malan. You convert all of your local currency into US dollars. This is a speculative venture. The change in currency value is a way to make a profit.

Many people view gold as a safe place to go in turbulent times. However, this precious metal’s price fluctuates, sometimes significantly, meaning that it is a speculative investment.
Although speculation is frowned upon, speculators play a vital role in the market by providing much-needed liquidity.

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