The art of speculation

Whether speculation has a place in investors’ portfolios is a highly controversial topic. Proponents of the efficient market hypothesis believe that market pricing is always fair, which makes speculation an unreliable and unwise path to profit. Speculators believe that the market has overreacted to a series of variables. These variables provide opportunities for capital growth.

Some market professionals regard speculators as gamblers, but a healthy market is not only made up of hedgers and arbitrageurs, but also speculators. The hedger is a risk-averse investor who buys positions that are opposite to those already held by others. If a hedger owns 500 shares of Marathon oil but is concerned that the price of oil may fall sharply soon, they may short the stock, buy put options or use one of many other hedging strategies.

Arbitrageurs try to take advantage of market inefficiencies. The latest example is delayed arbitrage. As a form of high-frequency trading, delay arbitrageurs try to use the time it takes for the quote to travel from the stock exchange to the buyer to place their computers in the same data center as the stock exchange server. Investors can use these microsecond delays to profit.

Key points

  • Speculation refers to the conduct of financial transactions. This type of transaction carries a great risk of losing value, but also holds the expectation of significant gains.
  • If there is no prospect of substantial gains, there is almost no incentive to participate in speculation.
  • Consider whether speculation depends on the nature of the asset, the expected duration of the holding period, or the amount of leverage applied.

What is speculation?

Each of these investors is essential for an efficient and healthy market, but what is speculation and why does it cause such fierce criticism?

Economist John Maynard Keynes is one of the financial giants. He said that speculation is about understanding the future of the market better than the market itself. Speculators are not buying stocks of high-quality companies that investors believe have long-term upside potential, but looking for opportunities that may have significant price fluctuations. Suppose investor A buys 300 shares of Boeing Company stock because they believe the aerospace industry is growing rapidly. If Boeing’s price drops for no reason tomorrow, they may buy more stocks because the price drop represents better value.

Speculator Investor B may sell 300 shares because this person believes that Boeing is ready for a short- or medium-term price increase. Investor B may have assessed Boeing’s health and other fundamentals, but the main indicator is expected short-term price changes.

Opponents of speculation argue that investing solely based on events that may occur in the near future is gambling. Speculators argue that they use a large number of data sources to evaluate a market where most gamblers are purely betting on opportunity or other statistically insignificant indicators.

Is speculation really as simple as it seems?

John Maynard Keynes went on to say, “For the public good, casinos should be off the beaten track and expensive. Maybe the stock exchange is the same.” Keynes knew what statistics show today in the early 20th century. . Trying to beat the market is as difficult as trying to beat a casino.

A study conducted by the North American Securities Administrators Association found that only 30% of speculators participating in day trading are profitable, and only 12% of speculators are likely to make long-term profits.

Profitable speculators usually work for trading companies that provide training and resources designed to increase the odds of success. For independent speculators, it takes a lot of time to study the market, pay attention to breaking news events, and learn and understand complex trading strategies.

How to speculate

The art of speculation covers a wide range of trading strategies, including pair trading, swing trading, using hedging strategies and identifying chart patterns. Speculators are usually good at fundamental analysis, including the discovery of overvalued or undervalued companies, the amount of short interest held by the company, and the analysis of earnings and other SEC reports.

In addition to evaluating products, skilled speculators also know that short-term changes in the investment market are largely related to world events. The Middle East conflict may affect oil prices. A key data in the Eurozone may cause drastic fluctuations in the broader market index. Substantial changes in the unemployment rate may cause the market to soar or plummet.

Speculators are unlikely, but the people who make this strategy a profitable risk are skilled market observers, investment product appraisers, and have experience in reading market sentiment.

Is speculation suitable for your investment portfolio?

The baby boomers who are about to retire are trying a new investment strategy, according to Los Angeles Times. Unlike the passive investment strategy most employees use for retirement accounts, more and more people are turning to speculation in an attempt to make up for the deficiencies of retirement accounts.

John C. Bogle, founder of The Vanguard Group, advises people to stick to long-term investments. In his book “Cultural Conflict: Investment and Speculation”, he pointed out that beating the stock market is a zero-sum game. When most traders fail, trying to beat the market with a retirement fund is an unwise use of money, and you will rely on this kind of money when you are unable to work in the future.

Most financial planners believe that it is only appropriate to speculate in a brokerage account with funds that are not necessary for the daily support of you or your family. Before participating in speculation, pay off debts, fund your retirement accounts, and start university funds if necessary.

No matter how you speculate, it should be a small part of your overall investment portfolio.

Learn to be a speculator

Every skill needs time to learn and master. Before trading with real money, please set up a virtual account through one of the many discount brokers or free websites. Understand the performance of the market and observe how your favorite stocks react to market events.

Traders cited the book “How to Make Money in Stocks” by William O’Neil as a valuable reference for learning the art of speculation. This book and many others provide practical tips on trading and risk management for aspiring traders.

Finally, building a community of traders you trust and analyzing their transactions is a valuable resource. Consider building a Twitter or Facebook list of successful traders. Find traders in your area and join an investment or trader club. Studying on your own rarely produces successful results. Use the experience of others and actively share your knowledge.

Bottom line

Since it is easy to enter the world investment market through an online brokerage portal, speculative activities have quickly become popular. Because speculation is difficult to master, so spend time trading in virtual accounts. When you see a continuous record of success in the upper and lower markets, you should consider speculating with real money.

The internet and financial media may encourage speculation, but this does not mean you should follow suit. Successful speculation requires a lot of skills, time and experience to master, and most people outside the financial industry do not have these skills, time and experience. Once dividends and long-term capital growth are considered, a more passive approach may produce better results.


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