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What is Stock Market Speculation?

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  • Written By: Osmand Vitez
  • Edited By: C. Wilborn
  • Last Modified Date: 24 March 2019
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Stock market speculation is when an investor purchases a stock because he believes the price will go up or down. Very little thought is given to the value of the stock or the company who issues the stock. Day traders are often the biggest users of stock market speculation; each day they review dozens of stocks to determine which ones they think will increase or decrease in price for the day. The trader will take a position in the stock and exit quickly when the stock reaches the expected price or moves opposite of the trader's expectations.

Individuals who engage in stock market speculation often review external factors that will affect a company's share price. For example, a company facing government fines or regulations, approval of a new pharmaceutical drug, merger or acquisition with another company, or high competitive risk typically makes for speculative stock purchases. Speculators will either purchase long or short positions in the stock. A long position indicates a belief in higher stock prices while shorting a stock means the speculator hopes the stock price decreases.

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Speculative stock purchases often have significant risks. Traders typically understand that they may lose their entire principal balance on stock purchases. A major swing in the opposite direction of the trader's position can quickly wipe out the entire value of the trade. Day traders do not often see this as risky as they may have multiple positions in different stocks to offset any major losses. These traders plan for multiple trades that earn small increases in price in order to make money.

Many government agencies regulate stock market speculation. The ability to sell a company's stock short in large groups can result in the company losing significant market value. In some cases, unethical traders may go short on a stock and then spread negative rumors about the company. This will result in a gain for the trader while damaging the company. When this occurs too often, day traders may come under investigation and face penalties for such trades.

The opposite of stock market speculation is making investments. This strategy follows the "buy and hold" theory. Investors will review a stock and determine the long-term expectations of the stock and the issuing firm. Rather than making a few quick dollars on price movements, the investor will make money from dividends given from the company to the shareholder or through long-term prices increases. This strategy works well for retirement accounts or similar types of investments.

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jessiwan
Post 1

I think I will share my thoughts on investing and/or speculating in the stock market.

Let me say one thing from the very beginning: it is incredibly risky, and it takes mental fortitude and a really strong stomach. When you buy the shares of a particular stock, chances are, its price will go up and down. If it goes up, great. However, when the price goes down, and it definitely happens, it will put you through some nightmarish stuff. I would watch my stock trade lower and lower, and once it reaches a certain point, a very very low point, I start to panic. I would ask myself, should I cut my losses and bail? If I bail out

now, I will only have lost ______ amount of money. And if I don't, the price could keep going and I would have even greater losses. But I do sell it now, then all that unrealized loss (the loss on the books) will become real, which means I will have irrevocably lost my hard-earned money. And if I sell it now but the price later on goes up, then I will really, really really kick myself. So, holding onto it, till the bitter end, is maybe, just maybe, the right thing to do? Nope. There is always this risk that your stock will be de-listed, which means ALL of your money will go poof. So, it's not simply a game of "hold onto it till you make it". There is a very real danger of losing it all. When you look at the charts of certain stocks, its easy to point to ones where the price now is higher than previously, and you might be tempted to think, "it's easy. Just ride it out and everything will be fine at the end". But the mental anguish that you would be going through during the bad periods is absolutely unbearable, and to me, it is really not worth it. Every downward tick feels like someone is knifing me in the gut. Sure maybe I can rake in a few hundreds dollars, sometimes thousands if I am lucky, but when I was right in the thick of it and needed to decide what to do and make a decision that I would not regret later on, it's simply too much strain on my mental health. And this is assuming that your lucky and your stock didn't trade so low that the stock exchange people decided to remove it.

I am sure that sometimes, some people will try to tell you that investing in the stock market is a good way to make money. They might say something like, "if you had bought company XYZ 20 years ago and held onto it, you would have $ _______ now". In a strict sense, these people are not lying. Maybe company XYZ really is doing very well. However, what they don't tell you is that there wasn't only this one company 20 years ago. There were many, many other companies, and let's just say 40 of them, and all 39 of them went under and only this one survived. And which do you think is more likely, would you be the lucky one to have bought XYZ, or would you be more likely to have bought any of the other 39? I find that this line of rhetoric very often comes from people who have vested interest in your handing over your money, like investment bankers, or reps from companies selling mutual funds (or similar products). I don't believe I have actually heard this line from regular people like you and me. I am not saying it is impossible to make money off of stocks, I am just saying that with the amount of knowledge that people like us typically possess, it is highly unlikely that we will always pick the winning ones. A small number of us will, but the vast majority won't. And for the latter, they lose untold amounts of money. It could even be all the money they have, like their retirement funds.

To me, you should consider the stock market only if you 1. have money you can afford to lose, and 2. absolutely know what you are doing. And even if you satisfy both of these criteria, there is still no guarantee that you will make money. Why? It's because the prices of stocks are driven not just by you, but by a lot of other people. And people sometimes get gripped by greed, sometimes panic, and most of them act irrationally. Even if you have done your homework and have decide a particular stock is a good investment, other people might not think so, and they act irrationally by dumping the shares, all because of something they heard. Or, you could find a company a very bad investment, but its price keeps going up for no good reason, and again, it's because people act irrationally. It's kind of like driving a car. You could be the most cautious driver on the road, but if the driver in the car coming at you from the other direction is reckless, and he rams into you, you are going to die. It's the same principle. Your skills, knowledge, and discipline are only half of the picture. The other half is in the hands of people who you have absolutely no control over.

The reason I invest in the stock market is not out of greed, as in, I am not a greedy little pig that tries to amass mountains of cash. I buy stocks because the interests that banks give out for super-safe products like savings accounts and term deposits are too low. My money would just keep losing purchasing power. So I enter the stock market in the hope of beating inflation. Speaking of which, I just have to wonder. I am no economist, however I don't need to be a financial expert to have an opinion, and my opinion is that if inflation is such an inherent part of our money supply, then maybe the kinds of money we have are crappy kinds. Just some food for thought.

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