Jun 30th, 2008
Working Backwards: What’s Speculation?
Speculation is a way of choosing rather high risk investments to try to make a profit from a projected positive price movement. Speculation is different from investment in that speculators acquire much more risk and hope to realize their gains in short periods of time. Speculation is sometimes successful and sometimes unsuccessful; both outcomes can be seen in real estate over the last few years. Those who entered the real estate market in the year 2001 and sold within the next two to four years likely did exceedingly well; those who entered the real estate market in 2005 hoping to make a substantial amount of money by selling their properties today are likely facing substantial losses.
Some speculators hedge their positions to try to protect against substantial losses; in addition, some speculators will use leverage to try to maximize their profits in their investments. For instance, if I believe that oil will continue to go up in price, I may sell my current investments and take out a home equity loan and buy oil with those funds. As you can likely derive from that example, a combination of leverage and an incorrect speculative investment can lead to financial disaster. Some speculators make tremendous amounts of money; others lose the same. Be very careful when considering an investment that’s speculative!
[...] Cents defines what speculation is and warns against it. (Good [...]
[...] Cents defines what speculation is and warns against it. (Good [...]