There’s no doubt that a significant number of investors in the financial market are speculation in one way or another. These are usually people who invest in short-term instruments hoping to gain a quick profit.
We all know that movement in the market is dictated by the actions of every individual investor whose cash fund the system. Trade movement, it is said, is simply an interpretation of the laws of supply and demand as applied to the financial market.
Because they make up a huge part of the investor force, it’s worth checking how speculation – and the decisions made by those investors who rely heavily on it – can impact the market and influence the prices within.
Speculation Drives Market Movement
Imagine that you’re a stock trader with holdings in Company A. As a good investor, you must make it a point to know as much as you can about Company A. You must keep track regularly of its financial health, upcoming products that are potentially lucrative, or a change in leadership.
One day, you see that the CEO has suddenly resigned and someone whose leadership you’re not confident in is about to take over. Instead of adopting a “wait and see” attitude, you decide to sell off some shares with the intent of using the proceeds to invest on more stable stock issued by another company as a hedge.
If you’re an influential trader, you could influence other speculators like yourself to sell off their shares as well. Before you know it, you, together with like-minded investors, have actually triggered a drop in the company’s share prices.
Speculation Avoids Drastic Price Changes
Basing on the above example, it is understandable why most long-term investors view speculation with some kind of disdain. However, if you look at it from another angle, speculators actually protect the price of the financial instrument from disastrous drops that could cripple all investors.
In a way, speculators help keep the market healthy and the investors protected by mitigating risk to those with lesser risk appetites and leaving the rest to those with appetites for high risk investments.
Speculation Avoids Shortages
This is true in the commodities market. Let’s take oil for example. It is one of the commodities that enjoy high demands globally, but is also one of the most volatile in terms of prices.
Because they are always working to avoid risks, commodities speculators will want to use futures investments in order to make sure they have access to oil at lower prices even though prices may rise up at specific points in time.
This action, called “stockpiling,” can actually encourage the market to move to produce more supplies in order to meet the demand. Because the investor has already agreed to purchase oil at a fixed price at a given time, somebody has to make sure that there are supplies to honor that agreement when it is time to collect.
While the high demand actually influences the prices to rise, consumers get a trade off – they can still enjoy guaranteed access to the commodity that they have a need for. This is all thanks to speculators’ decisions.
It may irk some investors, but the presence of speculation in a market means that it is healthy, and less prone to tampering by parties behind the scenes. Speculation is a very effective tool for investing when used wisely.
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