Speculation

Speculation involves the buying, holding, and selling of stocks, commodities, futures contract, currencies, collectibles, real estate, or any valuable thing to profit from fluctuations in its price as opposed to buying it for use or for income ( via dividends, rent etc). Speculation or agiotage represents one of three market roles in western financial markets, distinct from hedging and arbitrage.

Some perverse effects

Auctions are a method of squeezing out speculators from a transaction, but they have their own perverse effects; see winner's curse.

Related Topics:
Perverse effects - Winner's curse

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Speculative purchasing can also create inflationary pressure, causing particular prices to increase above their "true value" (real value - adjusted for inflation) simply because the speculative purchasing artificially increases the demand. Speculative selling can also have the opposite effect, causing prices to artificially decrease below their "true value" in a similar fashion. In various situations price rises due to speculative purchasing cause further speculative purchasing in the hope that the price will continue to rise. This creates a positive feedback loop in which prices rise dramatically above the underlying "value" or "worth" of the items. This is known as an economic bubble. Such a period of increasing speculative purchasing is typically followed by one of speculative selling in which the price falls significantly, akin to a crash (see stock market crash). This crash is often greater in severity than the preceeding period of rising prices.

Related Topics:
Positive feedback - Economic bubble - Stock market crash

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