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speculationthe buying and selling of COMMODITIES (tea, tin etc.), FINANCIAL SECURITIES (shares etc.) and FOREIGN CURRENCIES whose market prices are characterized by substantial fluctuations over time, by individuals and firms (speculators) in the hope of making windfall profits. For example, in the STOCK MARKET and FOREIGN EXCHANGE MARKET, a speculator may take a ‘bullish’ view that a share price or the exchange rate of a currency will rise and may gamble on this possibility by buying that share or currency, using either his or her own money or short-term credits, and hoping to resell it at a higher price after a few days or weeks, in order to make a capital gain on the difference between the two prices. On the other hand, the speculator may take a ‘bearish’ view that a share price or currency value will fall and may gamble on this possibility by selling the share or currency (even though he or she does not currently own any), using the proceeds from this sale to buy at a lower price the shares or currency he or she has promised to deliver a week or two later.
Speculative activity may have a destabilizing effect on share prices or exchange rates if speculators take a collective view that prices will rise or fall, accelerating and magnifying upward or downward price movements. Because of the disruptive effects of speculation on international trade, countries' central banks often intervene in the foreign exchange markets to maintain ‘orderly’ exchange rates. See ARBITRAGE, FORWARD MARKET, FLOATING EXCHANGE RATE SYSTEM, STAG, ACCOUNT PERIOD.
speculationthe purchase or sale of ASSETS, real or financial, to achieve a CAPITAL GAIN.
Investment decisions based on the hope and expectation there will be a profit, but no firm evidence that this will be the case. As a general rule, the more speculative the venture, the greater the reward should be,commensurate with the risk taken.