Global
financial markets are driven primarily by two factors: demand and supply, which
ultimately determine price levels and direction. Demand and supply are further
driven by several factors one of which is speculation. Other factors include
the activities of hedgers, arbitragers and investors.
financial markets are driven primarily by two factors: demand and supply, which
ultimately determine price levels and direction. Demand and supply are further
driven by several factors one of which is speculation. Other factors include
the activities of hedgers, arbitragers and investors.
Hedgers
seek to offset pre-existing risk, arbitragers seek to take advantage of
financial instrument price differences across different market segments, while
investors seek to profit through long term ownership of financial instruments
or assets. Speculation involves trading in financial assets such as stocks,
commodities and foreign currencies in the hope of gain, albeit with the risk of
loss. Speculators discount underlying gains in financial assets such as
interest, capital gains and dividends and focus largely on changes in market
value of the financial assets as a result of price movements.
seek to offset pre-existing risk, arbitragers seek to take advantage of
financial instrument price differences across different market segments, while
investors seek to profit through long term ownership of financial instruments
or assets. Speculation involves trading in financial assets such as stocks,
commodities and foreign currencies in the hope of gain, albeit with the risk of
loss. Speculators discount underlying gains in financial assets such as
interest, capital gains and dividends and focus largely on changes in market
value of the financial assets as a result of price movements.
A
speculator has only one goal – profit. Given that he seeks to take advantage of
arbitrage opportunities in the financial system, speculators often find themselves
at cross purposes with regulators and the real sector. In the process of
seeking to benefit from temporary structural imbalances in markets, speculators
are often accused of destroying economic value usually because their activities
often aggravate an existing, unwanted situation. Career speculators analyse
past and present fundamentals in an attempt to establish trends. Based on these
trends, they establish a view on market expectation and take a position based
on their expectation.
speculator has only one goal – profit. Given that he seeks to take advantage of
arbitrage opportunities in the financial system, speculators often find themselves
at cross purposes with regulators and the real sector. In the process of
seeking to benefit from temporary structural imbalances in markets, speculators
are often accused of destroying economic value usually because their activities
often aggravate an existing, unwanted situation. Career speculators analyse
past and present fundamentals in an attempt to establish trends. Based on these
trends, they establish a view on market expectation and take a position based
on their expectation.
Their
exposures maybe as a result of buying, selling or short selling any particular
trade-able asset with the aim of reversing (squaring) the exposure at future
profitable levels. Other speculators (scavengers) simply observe structural
imbalances within the financial system and seek to benefit from the imbalances
usually to the overall detriment of the economy and often against the wish of
financial regulators. Despite being seen as undesirable, activities of
speculators actually do have some beneficial impact on the economy. Perhaps the
most important advantage of speculation to the economy is the liquidity it
brings to markets.
exposures maybe as a result of buying, selling or short selling any particular
trade-able asset with the aim of reversing (squaring) the exposure at future
profitable levels. Other speculators (scavengers) simply observe structural
imbalances within the financial system and seek to benefit from the imbalances
usually to the overall detriment of the economy and often against the wish of
financial regulators. Despite being seen as undesirable, activities of
speculators actually do have some beneficial impact on the economy. Perhaps the
most important advantage of speculation to the economy is the liquidity it
brings to markets.
Real
demand and supply may not always be available and cannot sufficiently keep
markets active at all times. Since market efficiency is measured in terms of
effective pricing mechanism, size and depth, the activities of speculators
become relevant in buoying markets towards the desired levels of efficiency as
they provide “artificial” demand when “real demand” is not available and “artificial”
supply when “real supply” is not available. The risk they take (funded by their
capital) is against the expectation that real demand and supply will help push
prices to equilibrium. It is a speculator’s ability to accurately guess where
the equilibrium price levels set in that ultimately gives him his reward.
demand and supply may not always be available and cannot sufficiently keep
markets active at all times. Since market efficiency is measured in terms of
effective pricing mechanism, size and depth, the activities of speculators
become relevant in buoying markets towards the desired levels of efficiency as
they provide “artificial” demand when “real demand” is not available and “artificial”
supply when “real supply” is not available. The risk they take (funded by their
capital) is against the expectation that real demand and supply will help push
prices to equilibrium. It is a speculator’s ability to accurately guess where
the equilibrium price levels set in that ultimately gives him his reward.
Speculators
further enhance market efficiency through their presence in the markets by
making it easy for asset holders and exposed parties to measure risk by price
discovery. A market without speculators would only be active periodically, i.e.
when a real buyer and a real seller exist simultaneously. The price at which
their trade is struck would then be recorded as the reference rate. However,
with speculators in the market, trade volumes are high and frequent thus making
it easy to record series of reference prices for asset valuation and risk
evaluation purposes.
further enhance market efficiency through their presence in the markets by
making it easy for asset holders and exposed parties to measure risk by price
discovery. A market without speculators would only be active periodically, i.e.
when a real buyer and a real seller exist simultaneously. The price at which
their trade is struck would then be recorded as the reference rate. However,
with speculators in the market, trade volumes are high and frequent thus making
it easy to record series of reference prices for asset valuation and risk
evaluation purposes.
Finally,
commodity speculators willing to buy products up front (via derivatives)
actually indirectly boost the production of that product by creating up-front
demand. This triggers production with its attendant desirable effects on the
overall economy.
commodity speculators willing to buy products up front (via derivatives)
actually indirectly boost the production of that product by creating up-front
demand. This triggers production with its attendant desirable effects on the
overall economy.
By Olawale Hamed
