Speculation

Sometimes speculative purchasing can cause particular prices to rise above their "true worth" simply because the speculative purchasing is artificially increasing the demand. Speculative selling can also cause prices to fall below "true value" in a similar fashion. In some situations price rises due to speculative purchasing cause further speculative purchasing in the hope that the price will continue to rise. This creates a positive feedback loop in which prices rise dramatically above the underlying "value" or "worth" of the items. This is known as an economic bubble (or sometimes a speculative bubble). Such a period of increasing speculative purchasing is very often followed by one of speculative selling in which the price falls in a crash (see Stock market crash). This is often even more dramatic than the period of rising prices.

Speculators are comically pictured as speculating in pork bellies and such and often losing their shirts or making a fortune upon small market changes. Speculation exists especially in futures which involve leverage that can transform a small market movement into a huge gain or loss.

Most non-professional traders lose money on speculation. Occasionally some dramatic event will occur such as the effort of the Hunts[?] to corner the silver market or the currency speculations of George Soros.

Speculation can be economically useful as it can transfer risk from one party to another. For example, a pork bellies future effectively transfers risk from a farmer who is guaranteed a price for his pork bellies to a speculator who has the financial resources to withstand a lose should the price of pork bellies drop.

Speculation is the main approach to stock purchases now, with people betting on a gain in price "buy low sell high" and many companies now not even issueing dividends. Increasing of the stock price is the generally the main goal of CEO's, and making and sustaining a profit is only an indirect part of that process.

See also: Equity investment, Investment, Financial markets, Stock market bubble, Tobin tax, Tulipomania