Stock Market Speculation
With little or no exception, investors looking to make a profit in the stock market research a stock’s value, seeking to identify stock picks that will grow over time and enhance the investor’s portfolio and net worth. Whether they analyze and vet their potential stock picks by focusing on P/E ratio, on book value, on cash flow or on revenue, the investor incorporates some sort of analytical methodology into their decision making process and in doing so, relies on their knowledge, judgment and experience.
In contrast to investors, stock market speculators are unconcerned with value and instead, focus simply on the short-term gains to be made by purchasing and quickly flipping their stock holdings. True speculators have no need to understand an issuer’s fundamental business, industry trends or future prospects, rather, they focus on volatility, volume and share price without regard for additional corporate information. Volatility and liquidity are their mantras as they troll the markets for quick cash-generating opportunities, their buy orders causing an increase in the share price of the targeted stock. In this respect, the contemporary day-trader embodies the modern personification of a classic stock market speculator.
Pure stock market speculation typically causes more negative than positive market effects; in fact, it is usually only the individual speculator, if anyone, who experiences any positive benefit from his speculative activities. The increased liquidity introduced into the market through speculation is fleeting since by definition, speculators seek to realize their gains and remove their cash, with profits, from the markets. Once this occurs, the markets tighten, and the issuing companies rarely derive any benefit from the change in beneficial share ownership. Further, any increase in share price that may have occurred as a result of the bubble caused by increased speculative trading activities soon corrects itself shortly after the speculator has taken his profits out of the market, causing the bubble to burst and the remaining shareholders to experience a decrease in their share value. In its most extreme forms, rampant speculation, with its corresponding removal of cash from the markets, is unsustainable and can lead to market crashes of the type occurring in both 1929 and 1999-2000.
It’s very rare that an individual retail investor can succeed in making a profit on speculative trading activities over a prolonged or sustained period. Inevitably, because speculation implies the lack of research or due diligence into the particular target stocks or into the market factors affecting their movement, the retail investor will at best lose their profit and at worst, lose not only their profit but their initial capital as well. Unless you are an experienced day trader with a track record of success and thorough knowledge of how to quickly flip your holdings, you should avoid engaging in stock market speculation. Speculative trading should be left to the large institutional traders, such as hedge funds and mutual funds, who control the movement of a significant portion of market assets through their automated program trading and thus, will always outperform the retail speculative investor. Concentrate instead on building asset value by investing in stocks for longer term growth and enjoying the benefits of ownership over time, such as dividends and stock splits.