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Speculation is the purchase of an asset a commoditygoodsor real estate with the hope that it will become more valuable at a future date. In finance, speculation is also the practice of engaging in risky financial transactions in an attempt to profit from short term fluctuations in the market value of a tradable financial instrument —rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, dividends, or interest.
Many speculators pay little attention to the fundamental value of a security and instead focus purely on price movements. Speculation can in principle involve any tradable good or financial definitive guide to futures trading pdf. Speculators are particularly common in the markets for stocksbondscommodity futurescurrenciesfine artcollectiblesreal estateand derivatives.
Speculators play one of four primary roles in financial markets, along with hedgerswho engage in transactions to offset some other pre-existing risk, arbitrageurs who seek to profit from situations where fungible instruments trade at different prices in different market segments, and investors who seek profit through long-term ownership definitive guide to futures trading pdf an instrument's underlying attributes. With the appearance of the stock ticker machine inwhich removed the need for traders to be physically present on the floor of a stock exchange, stock speculation underwent a dramatic expansion through the end of the s.
The number of shareholders increased, perhaps, from 4. The view of what distinguishes investment from speculation and speculation from excessive speculation varies widely among pundits, legislators and academics. Some sources note that speculation is simply a higher risk form of investment. Others define speculation more narrowly as positions not characterized as hedging. Commodity Futures Trading Commission defines a speculator as "a trader who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements.
Speculation is condemned on ethical-moral grounds as creating money from money and thereby promoting the vices of avarice and gambling. There is opinion that it serves no purposes from a human and economic perspective .
Nicholas Kaldor  has long recognized the price-stabilizing role of speculators, who tend to even out "price-fluctuations due to changes in the conditions of demand or supply," by possessing "better than average foresight. Let's consider some of the principles that explain the causes of shortages and surpluses and the role of speculators. When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping definitive guide to futures trading pdf profit from the scarcity by buying.
Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other definitive guide to futures trading pdf, when the price is higher than the speculators think the facts warrant, they sell.
This reduces prices, encouraging consumption and exports and helping to reduce the surplus. Another service provided by speculators to a market is that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier or even definitive guide to futures trading pdf for others to offset riskincluding those who may be classified as hedgers and definitive guide to futures trading pdf.
If any market, such as pork bellieshad no speculators, only producers hog farmers and consumers butchers, etc. 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 wanted to trade pork bellies would be forced to accept this illiquid market and might trade at market prices with large bid-ask spreads or even face difficulty finding a co-party to buy or sell to.
By contrast, a commodity speculator may profit the difference in the spread and, in competition with other speculators, reduce the spread. Some schools of thought argue that speculators increase the liquidity in a market, and therefore promote an efficient market. Speculators take information and speculate on how it affects prices, producers and consumers, who may want to hedge their risks, needing counterparties if they could find each other without markets it certainly would happen as it would be cheaper.
A very beneficial by-product of speculation for the economy is price discovery. On the other hand, as more definitive guide to futures trading pdf participate in a market, underlying real demand and supply can diminish compared to trading volume, and definitive guide to futures trading pdf may become distorted. Speculators perform a risk bearing role that can be beneficial to society. For example, a farmer might be considering planting corn on some unused farmland. However, he might not want to do so because he is concerned that the price might fall too far by harvest time.
By selling his crop in advance at a fixed price to a speculator, he is now able definitive guide to futures trading pdf hedge the price risk and so he can plant the corn.
Thus, speculators can actually increase production through their willingness to take on definitive guide to futures trading pdf not at the loss of profit. Speculative hedge funds that do fundamental analysis "are far more likely than other investors to try to identify a firm's off-balance-sheet exposures" including "environmental or social liabilities present in a market or company but not explicitly accounted for in traditional numeric valuation or mainstream investor analysis".
Hence, they make the prices better reflect the true quality of operation of the firms. Definitive guide to futures trading pdf may act as a "canary in a coal mine" to stop unsustainable practices earlier and thus reduce damages and forming market bubbles. Auctions are a method of squeezing out speculators from a transaction, but they may have their own perverse effects by the winner's curse. The winner's curse, is however, not very significant to markets with high liquidity for both buyers and sellers, as the auction for selling the product and the auction for buying the product occur simultaneously, and the two prices are separated only by a relatively small spread.
That mechanism prevents the winner's curse phenomenon from causing mispricing to any degree greater than the spread. Speculation is often associated with economic bubbles. InJohn Maynard Keynes wrote: But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation.
As the Bursar of the Cambridge University King's College, he managed two investment funds, one of which, called Chest Fund, invested not only in the then 'emerging' market US stocks, but to a smaller extent periodically included commodity futures and foreign currencies see Chua and Woodward, It is controversial whether the presence of speculators increases or decreases short-term volatility in a market.
Their provision of capital and information may help stabilize prices closer to their true values. On the other hand, crowd behavior and positive feedback loops in market participants may also increase volatility.
The economic disadvantages of speculators have resulted in a number of attempts over the years to introduce regulations and restrictions to try to limit or reduce the impact of definitive guide to futures trading pdf. Such financial regulation is often enacted in response to a crisis as was the case with the Bubble Actwhich was passed by the British government at the height of the South Sea Bubble to try to stop speculation in such schemes.
It was left in place for over a hundred years until it was repealed in Another example was the Glass—Steagall Act passed in during the Great Depression in the United States ; most of the Glass-Steagall provisions were repealed during the s and s. The Onion Futures Act bans the trading of futures contracts on onions in the United States, after speculators successfully cornered the market in the mids; it remains in effect as of [update].
Some nations have moved to limit foreign ownership of cropland to ensure that food is definitive guide to futures trading pdf for local consumption while others have sold food definitive guide to futures trading pdf and depend on the World Food Programme. Inthe Indian government passed a law allowing the government partial restriction and direct control of food production Defence of India Act, It included the ability to restrict or ban the trading in derivatives on food commodities.
After independence, in the s, India continued to struggle with feeding its population and the government increasingly restricted trading in food commodities. Just at the time the Forward Markets Commission was established, the government felt that derivative markets increased speculation, which led to increased food costs and price instabilities. Init finally prohibited options and futures trading altogether. The CFTC offers three basic elements for their regulatory framework: Another part of the Dodd-Frank Act established the Volcker Rulewhich deals with speculative investments of banks that do not benefit their customers.
Passed on 21 Januarydefinitive guide to futures trading pdf states that those investments played a key role in the financial crisis of — From Wikipedia, the free encyclopedia. This article definitive guide to futures trading pdf about the financial term. For other uses, see Speculation disambiguation. For the Montana mining incident, see Speculator Mine disaster.
For the archaic tactic in rugby, see Field goal rugby. Speculative attackCurrency crisisBlack WednesdayFictitious capitalFinancial transaction taxCurrency transaction taxTobin taxand Spahn tax. The First Step toward a Rational Dialogue". The Journal of Alternative Investments. A guide to the language of the futures industry". Commodity Futures Trading Commission.
Retrieved 28 August Retrieved 27 August Gambling, the Gambling Culture, pp. Essays on Economic Stability and Growth.
The Free Press of Glencoe. The results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation, but rather by behavior that itself exhibits elements of irrationality. From Catastrophe to Chaos: A General Theory of Economic Discontinuities: Mathematics, Microeconomics, Macroeconomics, and Finance.
Retrieved 29 August Stephen Spratt of Intelligence Capital September Stamp Out Poverty report. Stamp Out Poverty Campaign. Retrieved 2 January Retrieved 21 August Retrieved 13 February Retrieved 28 May Lei, Vivian; Noussair, Charles N. Lack of Common Knowledge of Rationality Vs. Thrills, the Economy, and Popular Discourse. Primary market Secondary market Third market Fourth market. Common stock Golden share Preferred stock Restricted stock Tracking stock.
Authorised capital Issued shares Shares outstanding Treasury stock. Electronic communication network List of stock exchanges Trading hours Multilateral trading facility Over-the-counter. Alpha Arbitrage pricing theory Beta Bid—ask spread Book value Capital asset pricing model Capital market line Dividend discount model Dividend yield Earnings per share Earnings yield Net asset value Security characteristic line Security market line T-model.
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