What Is "speculation" in the Stock Market?


Quick Answer

According to the CFA Institute, speculation in the stock market is the practice of engaging in high-risk trading in order to make a significant profit quickly. Speculative trading is not based on traditional analysis of a stock's long-term value and stability. However, it is not conducted haphazardly and involves analysis of short-term variables, such as price fluctuations and market volatility.

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What Is "speculation" in the Stock Market?
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Full Answer

The CFA Institute explains that there has long been a lack of consensus about the difference between investing and speculation in the stock market. The terms have often been used interchangeably. All speculation is a type of investment, and all investment involves some type of speculation and risk, no matter how thorough the analysis. However, allowing for this gray area, analysts generally agree that it is appropriate to define speculation as engaging in risky trades in the pursuit of a quick profit, while trades that rely on long-term engagement for smaller but more stable profits are more properly classed as investments.

Because of their reliance on analyses of fresh trends, market analysts consider speculators to be a positive force in the market ecosystem, testing trends that are often later useful to long-term investors. However, the potential does exist for speculation to damage the market if it makes swings in prices too volatile.

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