Speculation & Financial Risk-Taking: Background

“Speculation” is an economic term used to describe financial risk taking. For example, an individual can engage in speculation by investing money in a new business venture where the outcome of profit or loss is unknown. A speculator can use a variety of factors to forecast a possible result for an investment but cannot definitively determine performance outcomes. More...

SOURCE: Speculation. (2015). In T. Riggs (Ed.), Gale Encyclopedia of U.S. Economic History (2nd ed., Vol. 3, pp. 1244-1245). Farmington Hills, MI: Gale.

"A person who is willing to take large risks and sacrifice the safety of principal in return for potentially large gains. Certain decisions regarding securities clearly characterize a speculator... there is a big gray area in which speculation and investment are difficult to differentiate."

SOURCE: speculator (punter). (2003). In D. L. Scott, Wall Street words (3rd ed.). Boston, MA: Houghton Mifflin.

"practice of engaging in business in order to make quick profits from fluctuations in prices, as opposed to the practice of investing in a productive enterprise in order to share in its earnings. The term is sometimes applied to investment in a venture involving abnormal risks along with the chance to earn unusually large profits, but most speculation consists in the buying and selling of commodities and stocks and bonds with the object of taking advantage of rapid changes in price." More...

SOURCE: speculation. (2016). In P. Lagasse, & Columbia University, The Columbia encyclopedia (6th ed.). New York, NY: Columbia University Press.

"Speculation can be compared to gambling. But whereas gambling is an artificial form of risk taking and has no relation to business operations or market forces, speculation relies on the marketplace and is subject to the whims of the economy."

"Speculation may also be confused with investment, which also takes place in the marketplace and is subject to the ups and downs of the economy; however, investment involves a limited risk of capital and is usually designed to generate a profit over the long term."

"Speculation often involves a larger amount of money and is aimed at achieving a high profit in a short time frame. Financial crises, such as the crash of 1929 and the recession that began in 2008, have been linked to speculation in the trading and consumer (particularly real estate) markets."

SOURCE: Speculation. (2015). In T. Riggs (Ed.), Gale Encyclopedia of U.S. Economic History (2nd ed., Vol. 3, pp. 1244-1245). Farmington Hills, MI: Gale.

"Speculation and speculative investments may occur when valuables are held or sought for future sale or purchase, respectively. Speculation and speculative investments may also occur when valuables are held or sought for a shorter or longer time than originally anticipated. Valuables can be securities, foreign currencies, commodities, pieces of art, land, and real estate, among other things.

The goal is to obtain the maximum profit (i.e., a favorable difference between the purchase price and the sales price). Timing is of great importance. A purchaser-investor or speculator-investor may believe that the future value of an item will increase, although there is a risk that the expected appreciation will either not happen at all or only happen much later than anticipated. Similarly, a seller-investor or speculator-investor may believe that the future of a valuable will decrease, although this may not occur or may occur at a different time than anticipated." More...

SOURCE: Anacker, K. B. (2012). Speculation. In A. T. Carswell (Ed.), The Encyclopedia of Housing (2nd ed., Vol. 2, pp. 698-701). Thousand Oaks, CA: SAGE Reference.

"When an asset’s valuation is inaccurately high and a bubble is created, the asset’s price can drop quickly when the bubble bursts. The recurrence of bubbles throughout history suggests that other factors must be involved in causing the price to be “too high” (or, in some cases, “too low”). These variables include behavioral/psychological factors, which can cause individuals to behave differently than how conventional economic theory predicts and lead them to value an asset more or less than its true worth." More...

SOURCE: Altman, Morris. Real-World Decision Making: an Encyclopedia of Behavioral Economics, edited by Morris Altman, ABC-CLIO, LLC, 2015. ProQuest Ebook Central.