Speculation

Speculators take positions based on their expectations of where prices will move. They may buy assets they expect to rise, or sell or short assets they expect to fall. Speculation occurs in shares, currencies, commodities, property, cryptocurrencies and especially derivatives, which allow large positions to be taken with relatively little money.

For example, a trader who expects oil prices to rise might buy oil futures contracts. If prices rise, the trader profits; if they fall, the trader loses, possibly more than the initial margin deposited.

Speculation differs from hedging, where the aim is to reduce risk, and from long-term investing, which focuses on the underlying value of assets rather than short-term price movements, although the line between them is not always clear.

Speculation plays useful roles in markets. Speculators provide liquidity, making it easier for others to buy and sell, and they take on risks that hedgers want to offload. But excessive speculation can contribute to price bubbles and sudden crashes, and speculators can lose large amounts of money, particularly when using borrowed money or leverage.