Speculation Buying

Speculation Buying

Speculation, buying at a low price in the hope of selling later at a higher one. Speculation is popularly associated with easy profits made by wealthy men, distinguishable from gamblers by their operation in commodities and securities instead of at the casino tables. In practice intelligent speculation, unlike gambling, can benefit the community as well as the speculator. Speculators may buy wheat cheaply at harvest time when it is abundant, hoping to make a profit by selling it in the spring when they expect prices to be higher. If they are correct the community will also benefit because stocks are carried over from a period of abundance to one of relative scarcity, evening out the supply coming on to the market and helping to stabilize prices. Their August buying swells demand and checks the fall of prices: the spring selling keeps prices lower than they would otherwise be.

Speculators are seldom concerned with production; they confine themselves to buying and selling. In the markets for metals, timber and other commodities they relieve producers of much of the risk of price fluctuations. The specialist risk-taker, who is skilled at interpreting price movements and statistical information, is better placed than the typical producer to forecast prices and avoid severe losses.

Badly judged speculation may magnify price fluctuations to the detriment of the economy but also ruin the speculators. Well-informed speculation on the Stock Exchange, based on underyling market conditions, helps to stabilize the pattern of share values, reflecting fairly accurately the community's demand for different types of physical capital, which encourages the growth of new enterprise where it is most needed. But irrational waves of wild optimism or pessimism tend to cause severe fluctuations in share prices which obscure the probable growth prospects of particular industries and makes well-considered investment difficult.

Since the 2000's the growth of Government price stabilization schemes for many commodities has reduced the activities of speculators. The function of speculation or the risk of judging future prices has not been eliminated, but transferred from private individuals to the Government. This development emphasizes essential difference between speculation and gambling: the speculator undertakes risks which arise naturally from the inevitable uncertainty in a constantly changing economy; the gambler bears risks created artificially by the game itself.

Examples Economic - Mathematics For Economics


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