Greetings traders and welcome back.
Thank you for joining me again for another In-Depth with
Chris episode. In today's discussion, we will be talking about speculators.
We're going to talk about exactly what a speculator is and
how it differs from a regular investor or a hedger, as well
as how speculators make money, and how they impact the financial
markets. We're going to cover all of that and more. If you
are one of my traders that thinks they have what it takes
to pass the Gauntlet Mini, then let me be the first to wish you the
best of luck on your journey, but without further ado,
let's dive on into our discussion today.
As far as the word "speculator" goes, there are a few different
definitions that you may find when you are browsing the web,
but the most common definition of what a speculator is, is
a person who is buying securities to sell them in the future,
hopefully at a nice profit. This is obviously the goal.
They don't want to lose money on the deal.
The speculator is the person that has a reason to believe
that something may be rising, or potentially falling,
and they're taking action now to re-exchange that action
at a future date in order to realize some profits.
That is what a speculator is at its core. You may be wondering,
well, isn't that the same thing as being an investor? Well
in some ways it is, but the critical difference is that in
the case of speculators,
they are not interested in holding the securities for a more
extended period. We can think of them as a shorter-term
investor. Unlike investors, their main reason for buying
securities is to sell them instead of retaining them. As with
any other form of trading, a speculator seeks to make predictions
about future price movements in whatever market they're
analyzing, but he or she is only interested in the real price differentials. In reality
there is no such thing as a 100% speculator, or a 100% investor
to the core. To some extent, every investor has speculative properties and every
speculator has investive properties as well.
The difference comes down to the generalized usage of
who we're referring to when we say a "speculator" or an "investor".
What does a speculator do? Well, a speculator employs
a well thought out strategy, which is typically done over
a shorter time frame to gain higher profits than traditional longer-term investors.
The speculator is trying to gain more money than the investor
doing it the slow and steady way. For this reason, speculators
usually take on more risk because risk is correlated in the
trading world with reward, and especially when it comes to
anticipating future price movements.
They do this to make a large enough profit to offset
the risk of what they took on in the first place.
You will find that most speculators are in volatile markets
where price movements are frequent.
They attempt to predict the price changes and profit from
those price moves. Speculators may even utilize leverage to
boost potential returns as well as losses.
Remember, it's a double-edged sword.
However, this is usually a personal choice and not necessarily
a speculator quality, per se, for the entire group.
These concepts are why speculators play a crucial role in
absorbing excess risk. They also pump liquidity into the
market by continuously buying and selling, instead of just
buying and holding. Furthermore,
it's something they do even when investors and other market
players are not participating. For instance, after the financial
markets crashed following this COVID-19 pandemic that we're
currently experiencing, many investors stop participating
in any trades. Instead, they were waiting for things to calm
down before they start buying back in. Speculators on the other hand,
were having a field day with all of the volatility.
There were speculators making very large profits, and losses
in that case, while also doing the purpose of serving liquidity to the market.
Here's a fun little cartoon that kind of personifies the
speculator, the investor, and then the gambler. The speculator
says, "hmmm the price has been going up, there seems to be heavy buying. I will
buy it at $200, and then later I should be able to sell it to a bigger fool at $250".
Mr. Investor says, "after my analysis,
I'm quite sure that the real value of the gadget is around
$100. It's not a good idea to buy it at the current market price of $200
despite the current market trend". Then Mr.
Gambler says, "oh my God! I need to buy this gadget now before
it's too late because everyone is buying so I must buy with no logical plan".
This is a very rough way to kind of showcase some of the differences,
but how do speculators make money? Well, because speculators
generally take on excessive risk within a shorter period,
they must be able to exert some form of control over price
momentum and direction. They do so by employing various strategies
such as stop-loss orders and position sizing. Generally,
their approach also includes keeping close tabs on the
statistics of their trading performance to get an idea if
they're doing well, or if they need to change anything.
Speculators are typically sophisticated, risk-taking individuals.
Despite that they are often confused with gamblers, this is not necessarily the case.
However, there is an important distinction between these
two. Market participants that use untested methods, or
execute trades based on hunches or feelings,
those are most likely the gamblers, like this guy here on the right.
They're just going with no logical reason on as to why they're
going. On the other hand, a profitable
speculator usually has put in a large amount of work with
a well-executed and proven strategy, with a sample size of
data to support why they should expect the outcome that they
expect, and that's how they're gaining the decisive edge that
they have over the gambler in the market. To stay profitable,
speculators are typically looking for reoccurring patterns
in the market movements.
They use this past historical data to justify what to expect
when these patterns reoccur again in the future.
Trading is detailed work, especially with prices constantly
moving, and there's no shortage of variables to consider.
That's why each speculator must first develop their own tried-and-tested
way of trading before they go in live for the Big Kahuna.
Speculators have a larger impact on the market than some might be led to believe.
Let's say a speculator believes that the price of a particular asset is going up.
They can choose to acquire as much of that asset as possible
with the hope of selling at that higher price, but that in
turn will drive the price up further. Other market participants
may see this activity as a positive sign, and doing so could
lead to further purchases of the asset. It's almost like a self-fulfilling
prophecy idea. If left unchecked, speculator activity
can make an asset price go way above its actual value.
The result is what's called a "speculative bubble".
We can see the same on the other side of the trade as well.
When a speculator believes the value of an asset is about
to decline further and they start selling that asset,
it can lead to a snowball effect of causing the asset to
devalue past its actual value point because everyone sees
the selling, and jumps on board with the selling, expecting
it to further drop more, and as a result of everyone selling,
it does in turn drop more.
The role of speculation on the market is quite an important
one. Speculation kind of exaggerates overall market moves,
and gives a more dynamic view of the market in both directions.
In the speculating world, there are four main categories
of which speculators tend to fall into. The first category
is the bull/bear speculator category. On the bull side of the
coin, we have a optimistic view where speculators are entering
the market expecting a security price to rise,
so they're looking to buy now and sell in the future. If their
expectations become a reality and prices rise, then they
make money. The bear speculators are quite simply the exact
opposite of that. They are the counterparty.
They are the counterparty to the optimistic.
They are the pessimistic speculators.
They're the ones that expect prices to fall, and generally
they expect prices to fall sharply.
What they're doing is, they're shorting an asset with an
expectation that the value of that asset will fall further,
and if it does, and reality holds true, and the pessimistic
view is right, then the bears will make their money.
Then, we have the stag speculators. A stag speculator is
generally cautious, especially compared to the bulls or bears.
Usually, they focus more on applying for new shares in companies.
Then, when the stocks take off, they sell at a premium, or at a profit.
They're looking more so for the opportunity to take advantage
of something that's extremely undervalued with a relatively low floor.
Then, we have the lame duck speculators, which is definitely the most fun one to say
in this category. The lame ducks are a term used to describe
speculators who are unable to cover their trading losses.
That's due to their inefficient trading strategies. This
type also includes traders who have defaulted on a debt and
are virtually bankrupt. All of these types of people fall
into the lame duck speculators category. The phrase originates
from the premise that traders who are unable to fulfill their
commitments are suffering heavy financial losses and have
yet to waddle away from the market.
You do not want to be a lame duck speculator.
Then finally, we have the jobbers. A jobber is a professional
speculator who is also a member of the stock exchange and
performs several essential functions.
They are independent dealers in traded assets and typically
execute the transactions in their own names.
They earn profits through speculating activities and only
interact with other jobbers or the broker, never a non-
member or a non-jobber. We have mentioned considerably some
of the differences between the speculator and the investor,
but now let's talk about briefly the difference between the
speculator and the hedger.
This guy here on the left, he has a pink nose. This guy here on the right,
he has a yellow nose. That is essentially the- I'm just kidding.
The difference between a speculator and a hedger is really
down to the fact that the hedger is less interested in the
risk that the speculator is, and as such, the speculator
stands to make more. Here's why: The hedger is always looking
to offset a position. With the hedger,
he has a position that's going up, and then he's using another
inversely correlated asset, or something along the likes, to
counteract the risk in case his asset that he wants to go
up does in fact go the opposite.
He's then invested in something that if his asset is going down, should be going up.
That's the concept there. It's basically going against yourself to minimize
the risk, should things go against you. With the speculator, he's only going up.
He's only going up, or he's only going down.
He's not doing anything to offset his risk.
Now, the positive side of this coin is, he stands to gain the
maximum amount of money of an asset rising because there's
nothing potentially holding him back. In the hedging situation,
he's limited to the amount of money he can make because if
his asset does go in the direction that he wants,
there's usually a good chance that the asset that he acquired
to offset his risk will limit and hold back some of his potential
gains because it will then most likely be a losing asset
or a losing position. With the speculating side of things,
there's literally only all correct or all wrong.
We don't live in a world when we're speculating where we
have portions of correct and portions of wrong like the hedgers do. Instead,
we are either correct with our assessment, or we are wrong.
It's either going to rise, or it's going to fall.
Even you can become a speculator, and to do so, the way that
we want to, is generally by becoming proficient with technical
analysis, as well as fundamental analysis. Being aware of swing
trading, pair trading, and utilizing various price action chart
patterns are all tools that are commonly employed by speculators.
Even hedging strategies can throw yourself into a speculative
position, even if it is a hedging strategy. There are a lot
of ways to get involved with speculating, but the key is to
make sure that you're not falling into that gambling category
like we initially talked about, and instead, you're getting
in with a logical, mathematical reason for doing so. There
are many advantages to speculating, but the three most prominent
advantages would be the economic welfare, increased market
liquidity, and risk bearing categories. With economic welfare, speculators provide
much-needed capital for young companies to grow and expand. At the very least,
they're providing a price support for assets that are temporarily
out of favor amongst other traders, and doing so does help
drive the economy forward. Then, we have increased market liquidity.
Since speculators are actively trading all the time, their
actions pump liquidity to the markets that they're participating
in. No one wants to buy or sell in an illiquid market,
so the markets in which the speculators are involved are usually
becoming more liquid, encouraging more trading. Then, we
have the risk bearing aspect.
The risk bearing is that because speculators have a higher risk tolerance,
they are often a good source of financing for companies in
general. The disadvantages of speculating can be broken down into two main subjects.
The first is the risk of unreasonable prices. Speculative
activities can sometimes push prices way above or below their
fair values. These price fluctuations may be in the short-
term only, but they can have long-term effects.
Then, we have the risk of the economic bubble. The risk of the economic bubble.
This just ties to the risk of unreasonable prices. Over time, speculative
bubbles can start to impact the overall economy,
especially in critical industries, like housing, currency,
and general trade as we have seen in the past. In conclusion,
because speculating provides liquidity in areas where liquidity
is needed, which is just about everywhere, as well as provides
financing for those smaller companies that are desperately in need of it,
speculating is something crucial in the financial marketplace.
It's not necessarily something that is going to to be for
everybody out there, but it is something to be aware of.
It's important to understand how speculating works. A broad portion
of you watching this video
most likely didn't even realize that you fall under the speculating
category, and hopefully not so much under the gambling category.
Thank you for joining me again, as always folks. Before you go,
please click the like and subscribe button down below.
I will be very appreciative of that.
Thank you very much everybody, until next time, over and out.