Speculation is a term used in finance to refer to the purchase of an asset with the hope that it will become more valuable shortly. It can also refer to short sales in which the speculator hopes for a decline in value. Speculation involves trading high-risk assets with the potential for substantial rewards, but it requires a solid understanding of market dynamics and effective risk management. Speculators are particularly common in the markets for stocks, bonds, commodity futures, currencies, fine art, collectibles, real estate, and derivatives.

Speculation is different from investment, which is characterized by a lower level of risk and a longer-term outlook. While some sources note that speculation is simply a higher-risk form of investment, others define speculation more narrowly as positions not characterized as hedging. It may sometimes be difficult to distinguish between speculation and simple investment, forcing the market player to consider whether speculation or investment depends on factors that measure the nature of the asset, expected duration of the holding period, and/or amount of leverage applied to the exposure.

Speculation can be associated with economic bubbles, which occur when the price for an asset exceeds its intrinsic value by a significant margin. Speculative bubbles are characterized by rapid market expansion driven by word-of-mouth feedback loops, as initial rises in asset price attract new buyers and generate further inflation. The growth of the bubble is followed by a precipitous collapse fueled by the same feedback mechanisms.

In conclusion, speculation involves trading high-risk assets with the potential for substantial rewards, but it requires a solid understanding of market dynamics, effective risk management, and a willingness to accept the possibility of significant losses.