Speculation

Speculation is taking financial risks in expectation of profit from uncertain future price changes. It differs from hedging, which seeks to reduce exposure to price risk.

Short selling: Selling borrowed securities with the aim of buying them back later at a lower price. A speculator can profit from an expected price decline by selling an asset short.
Financial risk: The possibility that financial outcomes will differ from expectations and cause losses. Speculation accepts financial risk rather than removing it.
Tulip mania: A Dutch trading boom in tulip bulbs that collapsed in 1637. Its enduring reputation as a speculative bubble makes it a classic, though debated, case.
Value investing: An investment approach that seeks assets trading below estimates of their intrinsic value. It bases decisions on estimated underlying worth rather than chiefly on anticipated price movements.
Leverage (finance): The use of borrowed funds or financial instruments to increase exposure relative to invested capital. Leverage magnifies both the gains and losses of speculative positions.
Market risk: The risk of losses caused by changes in market prices, rates, or other broad factors. Price changes are the uncertainty speculators deliberately take on.
South Sea Bubble: The 1720 collapse of inflated shares in the South Sea Company in Britain. Promotional excitement and leveraged share buying produced a landmark speculative boom and crash.
Arbitrage: The exploitation of price differences for the same or related assets across markets. Arbitrage seeks to capture discrepancies, unlike directional speculation on uncertain price changes.
Margin (finance): Collateral deposited to support a leveraged position or secure a financial obligation. Margin lets traders hold larger positions but can trigger forced liquidation when prices move against them.
Hedging (finance): A strategy that reduces exposure to adverse changes in asset prices or other financial variables. Hedging uses positions to limit risk, while speculation takes risk to seek profit.

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