Guide to Speculative Investments
A speculative investment is when an investor hopes to profit from a rapid change in the value of an asset, often one that’s considered non-productive.
Many speculative investments are short-term, and they can be made in markets such as foreign currencies, collectives, fine art, and margin trading of stocks.
Typically, speculative investments are high-risk positions in assets with frequent price fluctuations, providing both the opportunity to profit and the risk of loss.
What Are Speculative Investments?
In general, if an investor is investing in an asset with the belief that its value will increase within a short amount of time, and they will be able to sell it for more than they bought it for, that is a speculative investment.
The types of investments that fall into the speculative investing category are often referred to as non-productive assets, because they don’t produce any income while they are held by an investor, such as dividends or rental income.
The way investors make money on them is by speculating that someone else will buy the asset for more than they did at some point in the future. There is some underlying agreement in the markets that an asset has value despite its lack of production. For instance, gold and precious metals are considered valuable, and investors buy them predicting that their value will increase.
Conversely, non-speculative investments tend to be part of long-term investment strategies. These are assets that may increase in value over a longer period of time, and may also provide income while the investor owns them.
Examples of non-speculative investments can include real estate and owning part of a business, but even real estate and stock investments can be considered speculative in certain cases.
How Does Speculation Work?
As noted above, speculation is when investors anticipate that their purchase will go up in value and they will be able to sell it for a profit. Investors would be unlikely to take part in speculative investments unless there was a significant chance that they might see a significant gain, despite the risk exposure.
Investors typically consider many factors, such as a news event, election cycle, interest rate changes, or a new regulation. Any of these could spark a price change in a speculative asset.
If an investor has several speculative assets in a portfolio, they might hope that just one or two of them earn a huge profit, making up for any losses in other areas. Speculative investing poses a high risk for novice investors.
Speculation looks different depending on the market. For instance, speculation in the real estate market might look like an investor buying multiple properties with small down payments with a plan to quickly resell them for a profit.
Speculation can also look like betting against the market trend through short selling, a strategy where investors to bet that a particular stock’s future price will be lower than its current price. It’s the opposite of going long a stock, where an investor buys shares with the expectation that the stock price will increase.
4 Examples of Speculative Investments
Below are four examples of common speculative investments.
1. Foreign Currencies
One type of speculative investment is foreign currencies (forex). The forex market is the largest in the world. Around $6.6 trillion is transacted each day in the global foreign currency markets.
Forex trading involves buying and selling currency pairs such as EUR/USD. As the value of one currency goes down, the other goes up. Traders speculate on which way the relationship will go and hope to profit off the change in value.
Forex markets are open 24 hours a day, and investors can execute trades as quickly as seconds or minutes, making it a popular forum for speculation.
2. Precious Metals
Precious metals such as gold, silver, copper, and others are traded as hard commodities (versus soft commodities, like agricultural products). These are speculative investments that fluctuate in price constantly based on a variety of factors, including inflation, supply and demand for products that require these metals, and other trends.
Thus, investing in precious metals can be risky because they’re susceptible to volatility based on factors that can be hard to anticipate. Even a relatively stable commodity such as gold can be affected by rising or falling interest rates, or changes in the value of the U.S. dollar.
In the case of any commodity, it’s important to remember that you’re often dealing with tangible, raw materials that typically don’t behave the way other investments or markets tend to.
Cryptocurrencies are considered speculative since they fluctuate widely in price and come with high risk and potential high returns. Because the crypto markets are barely 14 years old, there isn’t a lot of history to the market to use for predictions, and no way of knowing whether a crypto like Bitcoin (or Ethereum, Solana, Litecoin, Dogecoin) will go to $100K or to $1K within the next year.
4. Bond Market
Asset prices in the bond market fluctuate widely depending on interest rate changes and political and economic conditions. The prices in the U.S. Treasuries market are often strongly influenced by speculation.
Bonds are rated by agencies such as Moody’s and Standard and Poor’s. Highly rated bonds are not considered speculative and are referred to as “investment grade,” while lower-rated bonds are considered speculative and referred to as “junk bonds.” Since junk bonds are riskier, they pay out higher interest rates to investors.
Pros and Cons of Speculative Investment
Speculative investments come with both upsides and downsides. The choice of whether to make speculative investments depends on an investor’s risk tolerance, knowledge about markets, and short- and long-term investment goals.
Some of the pros of speculative investments include:
• Potential for high returns
Downsides of speculative investments include:
• Don’t provide income while they are held. (With some exceptions, such as cryptocurrencies that earn interest through staking)
• Risk of losing one’s entire investment
• Requires active trading and time commitment
Speculative Investments vs Traditional Investments
Below are some of the key differences between speculative investing and traditional investing:
|Speculative Investments||Traditional Investments|
|High risk and active||Low- to medium-risk and generally more passive|
|Includes alternative and niche assets such as art, forex, and crypto||Generally includes traditional assets like stocks, bonds, and index funds|
Speculative Investments vs Gambling
The difference between speculation and gambling is that speculation involves taking a calculated risk on investing in an asset with an uncertain outcome but an expected return from the asset increasing in value. Gambling involves betting money with an uncertain outcome and the hope of winning more money.
Gamblers could be said to possess a more risk neutral outlook, in that they might disregard even high levels of risk for a potential reward. Speculative investors calculate the risk vs. the reward.
Other Risky Investments
In addition to the speculative investments highlighted above, the following are higher-risk types of investments that can be considered speculative.
Margin trading involves an investor borrowing money from a broker in order to make a trade rather than using a cash account to buy securities. Usually investors can only borrow up to 50% of the purchase amount of securities they want to buy. For example, if an investor with $3,000 in their account, can borrow $3,000, allowing them to purchase $6,000 worth of securities.
Typically, less experienced, risk-averse investors choose cash accounts vs. margin accounts because of the risks involved with leveraged positions. By using margin, the investor can place bigger bets. But if the trade doesn’t go in their favor they could lose both their own capital and the money they borrowed.
Margin accounts also charge interest, so any securities purchased need to increase above the interest amount for the investor to see a profit. Different brokers charge different interest rates, so it’s a good idea for investors to compare before choosing an account.
With options trading, investors purchase an option that gives them the ability to buy a stock in the future at a particular price if they choose to. In other words, options give holders the right, but not the obligation, to buy or sell an asset like shares of a company stock.
Options holders can buy or sell by a certain date at a set price, while sellers have to deliver the underlying asset. Investors can use options if they think an asset’s price will go up or down, or to offset risk elsewhere in their portfolio.
Options are considered financial derivatives because they’re tied to an underlying asset.
Penny stocks are high-risk stocks that have a low dollar value. Investors can buy several shares of them since they are so inexpensive, with the hope that they increase a lot in value over a short period of time. An event such as a big news story could trigger a change in stock value and provide the chance for a trader to cash out.
Speculative investments are risky, but can provide significant returns and can be a good way to diversify one’s portfolio. They are generally best for active traders looking for short-term investment opportunities, who can tolerate higher levels of volatility and risk.
Speculative investments are often considered non-productive assets, such as foreign and cryptocurrencies or commodities like gold or silver. But some stocks and bonds can be speculative too. Speculation is mainly the opportunity to profit from short-term price movements.
If you’re looking to start trading, consider margin investing with SoFi Invest. SoFi’s online investing app is streamlined and secure, so you can research, track, buy and sell on margin right from your phone or laptop. You can borrow money against your current investments to buy stocks and ETFs.
What are some examples of some speculative investments?
Examples of speculative investments include penny stocks, crypto, precious metals, and forex. Many speculative investments fall into the category of non-productive assets, and they’re usually susceptible to volatility, giving investors the opportunity to profit from short-term price movements.
Is speculative investing the same as gambling?
No, gambling involves betting money with the hope that you will win more money, while speculative investing involves buying an asset with the expectation that you will be able to sell it for a profit.
Is Bitcoin considered a speculative investment?
Bitcoin and cryptocurrencies are considered speculative investments because their prices fluctuate widely and are difficult to predict. They are risky and come with the potential for significant gains or losses.
Photo credit: iStock/Delmaine Donson
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