speculation

play
noun spec·u·la·tion \ˌspe-kyə-ˈlā-shən\
Updated on: 26 Jul 2017

Definition of speculation

  1. :  an act or instance of speculating: such asa :  assumption of unusual business risk in hopes of obtaining commensurate gainb :  a transaction involving such speculation

Examples of speculation in a Sentence

  1. He dismissed their theories as mere speculation.

  2. The book is just a lot of idle speculation about the future.

  3. Her speculations leave many questions unanswered.

  4. He lost everything in foolish land speculation.

Recent Examples of speculation from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'speculation.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of speculation

14th century


Financial Definition of SPECULATION

speculation

What It Is

Speculation is a method of short-term investing whereby traders essentially bet on the direction an asset's price will move.

How It Works

Technically, anyone who buys or shorts a security with the expectation of a favorable price change is a speculator. For example, if a speculator believes XYZ Company stock is overpriced, they may short the stock, wait for the price to fall, and make a profit. It's possible to speculate on virtually every security, though speculation is especially concentrated in the commodities, futures, and derivatives markets.

But to really understand speculation, one must understand how it differs from hedging. Let's consider an example: let's assume part of your investment portfolio includes shares of Company XYZ, which manufactures autos. Because the auto industry is cyclical, Company XYZ shares will probably decline if the economy starts to deteriorate.

If you want to protect this investment -- that is, you want to hedge your investment -- one way to do that is to buy defensive stocks. You may choose "noncyclicals," or companies that sell basic necessities like toothpaste or toilet paper. During economic slumps, these stocks tend to hold or increase their value, which could offset the loss in value of the XYZ shares.

A speculator wouldn't follow this strategy. If a speculator purchased food-company stocks, he would do so because he simply believes the stock is going to increase.

Speculation can increase short-term volatility (and thus, risk). It can inflate prices and lead to bubbles, as was the case in the 2005-2006 real estate market in the United States. Speculators who were betting that home prices would continue to increase purchased houses (often using leverage) intending to "flip" them for a profit. This increased the demand for housing, which raised prices further, eventually taking them beyond the "true value" of the real estate in many markets. The frenzied selling that ensued is typical for speculative markets.

Why It Matters

Some people may see speculators as dangerous gamblers, but speculators actually provide much-needed liquidity to markets and are thus a vital component of market efficiency. Without them, many commodities markets, for example, would virtually grind to a halt because the only participants would be farmers and food companies. With fewer participants in a market, bid-ask spreads would widen and it would be much harder for buyers and sellers to find each other. The resulting illiquidity would dramatically increase the risk in that market.


SPECULATION Defined for English Language Learners

speculation

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noun

Definition of speculation for English Language Learners

  • : ideas or guesses about something that is not known

  • : activity in which someone buys and sells things (such as stocks or pieces of property) in the hope of making a large profit but with the risk of a large loss


SPECULATION Defined for Kids

speculation

play
noun spec·u·la·tion \ˌspe-kyə-ˈlā-shən\

Definition of speculation for Students

  1. 1 :  2guess

  2. 2 :  the taking of a big risk in business in hopes of making a big profit


Law Dictionary

speculation

play
noun spec·u·la·tion \ˌspe-kyə-ˈlā-shən\

Legal Definition of speculation

  1. :  an act or instance of speculating: as a :  assumption of unusual business risk in hopes of obtaining commensurate gain b :  a transaction involving such speculation



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