Speculation is the art of trying to make a profit for yourself or to avert (or lessen) an impending loss. Just about everyone (except perhaps monks who have pledged their lives to a monastery) speculates, in some form or other, at some point in their lives.

Ever bought several prepaid bus tickets because you knew that the government was going to raise bus fares? Ever stockpiled food before the flood season? Bought property with the intention to sell for a profit? Bought any kind of collectible (coins, stamps, phonecards, etc.) with the intention of possibly selling it later?

Speculators are not limited to the financial markets. Not by a long shot.

Having said that, you are also allowed to speculate in the futures or commodities markets with a position in the underlying instrument. For example, you could engineer a short squeeze by buying up and taking delivery of the commodity that you wish to run the price up of - you need deep pockets, somewhere to store the stuff and a world deficit of the thing in question.


Speculation is risky, yes, but sometimes it is riskier not to speculate.


Another common misconception is that speculators are the cause of financial crashes. This is perhaps the biggest misconception the general public has about the financial world today. If a currency collapses after a concerted attack by speculators, it is by no means the speculators' fault. The underlying weaknesses were, no doubt, cause by years of monetary mismanagement by the central bank of the country.

Speculators perform a very useful function in the market - they assume risk. Their mere presence and willingness to trade reduces the bid-ask spread, increases the number of trades (thereby providing liquidity) and makes the market run more smoothly.