Connect with us

What Is Speculation? Definition, Risks & Examples

What Is Speculation?Ready to roll the dice in the stock market? In finance, big risk taking is known as speculation. Traders who speculate invest in assets…

Published

on

by pxel66 from GettyImages; Canva

What Is Speculation?

Ready to roll the dice in the stock market? In finance, big risk taking is known as speculation. Traders who speculate invest in assets that have the potential for big gains—as well as big losses. Speculative traders and investors, or speculators, purchase an asset in the hopes that its value will increase in the near term. Conversely, they could also invest in the hopes that an asset will lose value, which is a practice known as short selling.

Unlike fundamental analysis, speculators tend to solely focus on price movement. In the stock market, they pay little attention to earnings reports, analyst estimates, or other company history. Instead, their goal is to make a quick profit by getting in and out of a stock, which has inspired the term “fast money.” Often, they do this through technical analysis, such as chart reading.

You could say that speculators are the antithesis of Warren Buffett, the “Oracle of Omaha,” who makes long-term investments in companies usually trading below their intrinsic value. Speculative trading occurs over a much shorter timeframe, be that a year, a couple of months, a few days—or even less.

What Are Some Types of Speculation?

All speculators share one thing in common: They are trying to take advantage of price inefficiencies by buying when prices are at a bottom and selling when they are near a peak. There are a few different ways to achieve this:

  • Bullish speculators enter long positions with the expectation that prices will rise in the near term.
  • Bearish speculators open short positions in the hopes that prices will fall.
  • Short-term traders attempt to “time the market” and are usually in and out of a position in a matter of seconds, minutes, or hours. They could use automated trading systems or place manual orders, and they set buy stops or sell stops to protect themselves from market reversals.
  • Swing traders usually establish positions for a longer timeframe, usually anywhere between a few days and one year. Their hope is to profit from the “swing” in price movements.

What Are Some Examples of Speculative Trading?

Speculators who can stomach big risks could also be setting themselves up for big gains. Take a look at a few examples:

The Big Short

Perhaps the best-known speculator is hedge fund manager Michael Burry, known as “The Big Short.” He gained notoriety by shorting overvalued tech stocks in the early 2000s. He was also one of the first to call a bubble in the U.S. housing market, which was fueled by toxic subprime debt. When interest rates rose and mortgage holders could no longer afford to make their housing payments, millions of homeowners defaulted, causing a near-total collapse of the U.S. real estate market and a global chain of falling dominoes, since the loans were packaged and traded by investment banks. This crisis became known as the Financial Crisis of 2007-2008 and led to the Great Recession. Burry is said to have made between $100 million and $700 million from speculation on the event.

Currencies

Another example of speculative trading occurs with currencies and cryptocurrencies. Traders attempt to profit from the difference in value of one currency with respect to another currency, which can have a dramatic impact on prices. In 1992, George Soros, another hedge fund manager, bet that the British pound would depreciate against the U.S. dollar, netting a billion-dollar profit in the process. Nowadays, Bitcoin speculators have become known as the “new day traders” since cryptocurrencies can be bought in fractional pieces, and their prices have witnessed enormous swings.

COVID-19 Plays

Trading opportunities related to the COVID-19 pandemic are yet another example of speculation. When the Federal Reserve slashed interest rates and also injected billions of dollars into the markets through quantitative easing measures, they caused enormous ups and downs, known as volatility. This, in particular, led to speculation of Treasury futures.

What Are Some Risks Associated With Speculation?

Buying at the bottom and selling at the top is much easier in theory than in practice. Therefore, speculators must beware of the numerous risks that come with fast money; otherwise they’re just taking gambles:

  • Volatility increases the amount of risk in the market, because price fluctuations present more opportunities to create profits—as well as opportunities to mount losses. Speculators who trade during periods of volatility should have a solid understanding of the VIX, or Volatility Index, as well as support and resistance levels.
  • There’s an old saying in the stock market that goes, “You never know you’re in a bubble until it bursts.” When prices rise rapidly, there is the potential for quick gains, but once the bubble pops, capitulation often follows, which makes it very difficult to offload one’s now-overvalued assets.
  • Short selling involves buying on margin, which can have a much steeper downside than investing in cash, because one’s losses are compounded. When a phenomenon like a short squeeze happens, a stock’s price suddenly skyrockets, and short sellers can lose exponentially more than their initial investment. In fact, as a way to limit risk, the Federal Reserve has set requirements for short selling, prohibiting an investor from borrowing no more than 50 percent of the price of the shares on margin.

What Are the Benefits of Speculation?

There are upsides to speculation; in fact, many believe that speculators help to make the markets more efficient. Simply by placing their trades, speculators help to add liquidity, and when an asset, such as a stock, is liquid, that means its shares can be bought—and sold—quickly with minimal impact to its market price. Therefore, liquidity makes it easier to buy and sell whenever it’s necessary. Without such trading activity, the markets would become illiquid.

Without speculators, there would be fewer players in the markets, which would also have an impact on buy-and-sell transactions, thereby widening bid-ask spreads. The spread is the difference between the quoted price (ask) and its immediate purchase price (bid). Therefore, increased opportunities for trading result in easier trading activity.

Read More

Continue Reading

International

Global Wages Take A Hit As Inflation Eats Into Paychecks

Global Wages Take A Hit As Inflation Eats Into Paychecks

The global inflation crisis paired with lackluster economic growth and an outlook…

Published

on

Global Wages Take A Hit As Inflation Eats Into Paychecks

The global inflation crisis paired with lackluster economic growth and an outlook clouded by uncertainties have led to a decline in real wages around the world, a new report published by the International Labour Organization (ILO) has found.

As Statista's Felix Richter reports, according to the 2022-23 Global Wage Report, global real monthly wages fell 0.9 percent this year on average, marking the first decline in real earnings at a global scale in the 21st century.

You will find more infographics at Statista

The multiple global crises we are facing have led to a decline in real wages.

"It has placed tens of millions of workers in a dire situation as they face increasing uncertainties,” ILO Director-General Gilbert F. Houngbo said in a statement, adding that “income inequality and poverty will rise if the purchasing power of the lowest paid is not maintained.”

While inflation rose faster in high-income countries, leading to above-average real wage declines in North America (minus 3.2 percent) and the European Union (minus 2.4 percent), the ILO finds that low-income earners are disproportionately affected by rising inflation. As lower-wage earners spend a larger share of their disposable income on essential goods and services, which generally see greater price increases than non-essential items, those who can least afford it suffer the biggest cost-of-living impact of rising prices.

“We must place particular attention to workers at the middle and lower end of the pay scale,” Rosalia Vazquez-Alvarez, one of the report’s authors said.

“Fighting against the deterioration of real wages can help maintain economic growth, which in turn can help to recover the employment levels observed before the pandemic. This can be an effective way to lessen the probability or depth of recessions in all countries and regions,” she said.

Tyler Durden Mon, 12/05/2022 - 20:00

Read More

Continue Reading

Uncategorized

Metaverse comes in second place as Oxford’s word of the year

The term describing an internet-enabled virtual world lost to "goblin mode" in 2022 — "a type of behavior which is unapologetically self-indulgent, lazy,…

Published

on

The term describing an internet-enabled virtual world lost to "goblin mode" in 2022 — "a type of behavior which is unapologetically self-indulgent, lazy, slovenly, or greedy."

“Metaverse” has come in second to “goblin mode” as the Oxford University Press’ 2022 word of the year after the process was opened up to voters for the first time ever.

In a Dec. 4 announcement, Oxford Languages said the viral term “goblin mode” beat out “metaverse” and #IStandWith to become its 2022 word of the year. According to Oxford’s research, usage of the term metaverse “increased almost fourfold from the previous year in the Oxford Corpus,” driven in part by Facebook’s rebranding to Meta in October 2021.

Metaverse lost to goblin mode, which went viral in February, as it seemingly “captured the prevailing mood of individuals who rejected the idea of returning to ‘normal life’” following COVID-19 lockdowns being lifted in many areas. #IStandWith took third place in the contest, driven by social media hashtags including #IStandWithUkraine following Russia’s invasion of the country in February.

“As we grapple with relatively new concepts like hybrid working in the virtual reality space, metaverse is particularly pertinent to debates about the ethics and feasibility of an entirely online future," said Oxford Languages. "A worthy opponent to ‘goblin mode’, ‘metaverse’ gained voting traction with crypto communities and publications. We see the term continue to grow in use as more voices join the debate about the sustainability and viability of its future."

In the video pitch for ‘metaverse’ released in November, Oxford said the term dated back to “the science fiction novel Snow Crash by Neil Stephenson,” released in 1992.

More than 300,000 people cast votes between the three terms shortlisted by Oxford Languages.

Related: The metaverse is happening without Meta's permission

“NFT,” or nonfungible token, won Collins Dictionary’s contest for the word of 2021, while “vax” took first place as Oxford’s chosen word that the same year. The latest results seemingly represent a change in social media fervor around the crypto-related terms, which was reportedly falling in the first quarter of 2022.

Read More

Continue Reading

Uncategorized

United Airlines stock has a 50% upside from here: Morgan Stanley

United Airlines Holdings Inc (NASDAQ: UAL) is keeping in the green on Monday in an otherwise down market after a Morgan Stanley analyst said 2023 could…

Published

on

United Airlines Holdings Inc (NASDAQ: UAL) is keeping in the green on Monday in an otherwise down market after a Morgan Stanley analyst said 2023 could be a “goldilocks” year for the air carrier.

United Airlines stock has upside to $67

Ravi Shanker sees upside in the airline holding company to $67 that translates to a near 50% premium on its current stock price.

He upgraded United Airlines stock to “overweight” this morning because he’s convinced that international travel will recover swiftly in 2023.

Earnings recovery post pandemic has kept pace with, if not led, peers and messaging has been very confident. We expect more normalised, just right conditions in 2023, stabilizing at level more favourable to earnings that market is pricing in.

Shanker expects continued leisure demand next year while business travel, he wrote, could exceed levels last seen before the COVID pandemic.

UAL has outperformed peers year-to-date

According to the Morgan Stanley analyst, prices will ease in 2023 as capacity returns. CASMxF trajectory was among other reasons cited for the bullish call.

United Airlines stock is roughly flat for the year at writing versus other major airline stocks in the red. Still, Shanker continues to see its current valuation as attractive. His note reads:

United Airlines Holdings Inc seems on track to exceed its 2023 guidance and to hit its 2026 guide issued eighteen months ago – something even the biggest UAL bulls may have considered difficult at the time.

In October, the Chicago-headquartered air carrier reported its financial results for the third quarter that handily topped Street estimates.

The post United Airlines stock has a 50% upside from here: Morgan Stanley appeared first on Invezz.

Read More

Continue Reading

Trending