What was speculation

Bonds that are considered strong, with a high likelihood that investors will receive their interest payments and principal, are known as "investment grade. In some circles, the terms speculation and investment are used interchangeably. But, practically, there are some key differences in the level of risk and the types of financial instruments used between investors and speculators.

That specialized knowledge and higher disposable income can result in a higher tolerance for risk than the average person she added. Speculation is not for the faint of heart. While the allure for big-time gains are present, it may be wise to consult a financial planner to ensure that you are not taking on more than you can handle. Also consider taking a risk tolerance questionnaire to help prepare and understand how you may react to losses.

Finally, make sure that you have a plan in place to address your immediate, short-term and long-term financial goals and keep them separate from any speculative moves you may have in mind. For you. World globe An icon of the world globe, indicating different international options. Get the Insider App. Click here to learn more. A leading-edge research firm focused on digital transformation.

Good Subscriber Account active since Shortcuts. Account icon An icon in the shape of a person's head and shoulders. It often indicates a user profile. And dividends were important because it was to get those — not capital gains — that people bought stock. Matters changed starting in the s. The move from dividends to capital gains had begun in earnest. Speculation now meant investing in the hope of capital appreciation — that is, selling to somebody for a higher price than you paid.

This meant that a share of stock was worth what you paid for it. That was investing, not speculating. Cold hard realities have brought this belief into serious question. There is less doubt about the speculative nature of derivative securities that began to develop in the s and exploded at the turn of the 21st century.

Think of the shape of a tornado. The productive asset — the asset that generated the revenue to pay the claims — was a point at the bottom.

As claims proliferated from that point up, they expanded higher and higher, wider and wider, far beyond the capacity of the energy at the bottom — the earnings — to sustain it.

When investors at the top woke up and realized this, they started massive selloffs — and the whole structure came crashing down.

Another way of looking at this is as a Ponzi scheme. Mutual funds and hedge funds often engage in speculation in the foreign exchange markets as well as bond and stock markets.

This market is dominated by asset managers and hedge funds with multi-billion-dollar portfolios. Speculation in the forex markets can be hard to differentiate from typical hedging practices, which occur when a company or financial institution buys or sells a currency to hedge against market movements.

For example, a sale of foreign currency related to a bond purchase can be deemed either a hedge of the bond's value or common speculation. These relationships can get complicated to define if the currency position is bought and sold multiple times while the fund owns the underlying bond.

The largest single world market trades U. Treasuries, with prices in that venue often driven by common speculation. Bank for International Settlements. Investing Essentials. Trading Basic Education. Portfolio Management. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

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Definition: Speculation involves trading a financial instrument involving high risk, in expectation of significant returns. The motive is to take maximum advantage from fluctuations in the market. Description: Speculators are prevalent in the markets where price movements of securities are highly frequent and volatile. They play very important roles in the markets by absorbing excess risk and providing much needed liquidity in the market by buying and selling when other investors don't participate.

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