Stock market speculation is when an investor purchases a stock because he believes the price will go up or down. Very little thought is given to the value of the stock or the company who issues the stock. Day traders are often the biggest users of stock market speculation; each day they review dozens of stocks to determine which ones they think will increase or decrease in price for the day. The trader will take a position in the stock and exit quickly when the stock reaches the expected price or moves opposite of the trader’s expectations.
Individuals who engage in stock market speculation often review external factors that will affect a company’s share price. For example, a company facing government fines or regulations, approval of a new pharmaceutical drug, merger or acquisition with another company, or high competitive risk typically makes for speculative stock purchases. Speculators will either purchase long or short positions in the stock. A long position indicates a belief in higher stock prices while shorting a stock means the speculator hopes the stock price decreases.
Speculative stock purchases often have significant risks. Traders typically understand that they may lose their entire principal balance on stock purchases. A major swing in the opposite direction of the trader’s position can quickly wipe out the entire value of the trade. Day traders do not often see this as risky as they may have multiple positions in different stocks to offset any major losses. These traders plan for multiple trades that earn small increases in price in order to make money.
Many government agencies regulate stock market speculation. The ability to sell a company’s stock short in large groups can result in the company losing significant market value. In some cases, unethical traders may go short on a stock and then spread negative rumors about the company. This will result in a gain for the trader while damaging the company. When this occurs too often, day traders may come under investigation and face penalties for such trades.
The opposite of stock market speculation is making investments. This strategy follows the “buy and hold” theory. Investors will review a stock and determine the long-term expectations of the stock and the issuing firm. Rather than making a few quick dollars on price movements, the investor will make money from dividends given from the company to the shareholder or through long-term prices increases. This strategy works well for retirement accounts or similar types of investments.