What is Speculating?
- This is the broad category under which activities of most investors fall, which involves buying or selling a financial asset, usually in the face of higher-than-ordinary risk, in order to take advantage of an expected move. Speculators in the currency market wager that, in the future, the value of a currency will move higher or lower relative to another currency. In addition to individual investors, speculators in the currency market can include hedge funds, commercial banks, pension funds or investment banks.
Roles of Speculators
Speculators play one of three primary roles in financial markets,
- Hedgers who engage in transactions to offset some other pre existing risk,
- Arbitrageurs who seek to profit from situations where interchangeable instruments (goods that consist of many identical parts which can be easily replaced by other, identical goods) trade at different prices in different market segments
- Investors who seek profit through long-term ownership of an instrument's underlying attributes. The role of speculators is to absorb excess risk that other participants do not want, and to provide liquidity in the marketplace by buying or selling when no participants from the other categories are available.
- It may sometimes be difficult to distinguish between speculation and investment, and whether an activity qualifies as speculative or investing depends on a number of factors, including the nature of the asset, the expected duration of the holding period, and the amount of leverage.
By taking advantage of already unstable currencies, Speculation can sometimes create more instabilities also. National banks will sometimes react to stabilize their currency, though it is unclear as to exactly how much of an effect that they can have. Market forces sometimes overwhelm the attempts of a central bank to stabilize its national currency, as the combined strength of worldwide Forex investors often outstrips the purchasing power of national banks.
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