What is speculative buying

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Deep Dive Into Cryptocurrency. ET Markets Conclave — Cryptocurrency. Reshape Tomorrow Tomorrow is different. Let's reshape it today. Corning Gorilla Glass TougherTogether. ET India Inc. ET Engage. But, practically, there are some key differences in the level of risk and the types of financial instruments used between investors and speculators.

That specialized knowledge and higher disposable income can result in a higher tolerance for risk than the average person she added. Speculation is not for the faint of heart. While the allure for big-time gains are present, it may be wise to consult a financial planner to ensure that you are not taking on more than you can handle.

Also consider taking a risk tolerance questionnaire to help prepare and understand how you may react to losses.

Finally, make sure that you have a plan in place to address your immediate, short-term and long-term financial goals and keep them separate from any speculative moves you may have in mind. For you. World globe An icon of the world globe, indicating different international options. Get the Insider App. Click here to learn more.

A leading-edge research firm focused on digital transformation. Good Subscriber Account active since Shortcuts. Account icon An icon in the shape of a person's head and shoulders. It often indicates a user profile. Log out. Investment Assets. List of Partners vendors. A speculative stock is a stock that a trader uses to speculate. The fundamentals of the stock do not show an apparent strength or sustainable business model, leading it to be viewed as very risky and trade at a comparatively low price, although the trader is hopeful that this will one day change.

This may be a penny stock or an emerging market stock that the trader expects to become much better known very soon. Many traders are drawn to speculative stocks due to their higher volatility relative to blue-chip stocks , which creates an opportunity to generate greater returns—albeit at greater risk. Most long-term investors and institutional investors stay away from speculative stocks unless they are part of a mutual fund or exchange traded fund ETF.

Speculative stocks appeal to short-term traders due to their low share price and greater volatility compared to traditional blue-chip stocks. The greater volatility enables traders to realize windfall profits if the trade works out in their favor.

The challenge is to find ways to limit losses if the trade does not work out. Oftentimes, speculative stocks are clustered in sectors such as mining , energy , technology , and biotechnology. While there is significant risk involved in investing in early-stage companies in these sectors, the possibility that a small company may find a giant mineral deposit, invent the next big app, or discover a cure for a disease offers enough incentive for speculators to take a chance on them.

Although most speculative stocks tend to be early-stage companies, a blue-chip can occasionally become a speculative stock if it falls upon hard times and has rapidly deteriorating prospects for the future.

Such a stock is known as a fallen angel and may offer an attractive risk-reward payoff if it can manage to turn its business around and avoid bankruptcy. Speculative stocks generally outperform in very strong bull markets when investors have abundant risk tolerance. For such stocks, alternative techniques such as the discounted cash flow DCF valuation or peer valuation may need to be used to account for future potential rather than current fundamentals.

Speculative stocks often account for a small portion of portfolios held by experienced investors because such stocks may improve the return prospects for the overall portfolio without adding too much risk, thanks to the beneficial effects of diversification.

Experienced investors who dabble in speculative stocks typically look for companies that have good management teams, strong balance sheets , and excellent long-term business prospects. Most investors should avoid speculative stocks unless they have the time to dedicate to research.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. What is Speculation? Key Takeaways Speculation refers to the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain Without the prospect of substantial gains, there would be little motivation to engage in speculation.

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