With speculation, the risk of loss is more than offset by the possibility of a substantial gain or other recompense. An investor who purchases a speculative investment is likely focused on price fluctuations. While the risk associated with the investment is high, the investor is typically more concerned about generating a profit based on market value changes for that investment than on long-term investing.
When speculative investing involves the purchase of a foreign currency, it is known as currency speculation. In this scenario, an investor buys a currency in an effort to later sell that currency at an appreciated rate, as opposed to an investor who buys a currency in order to pay for an import or to finance a foreign investment. Without the prospect of substantial gains, there would be little motivation to engage in speculation.
For example, real estate can blur the line between investment and speculation when buying property with the intention of renting it out. While this would qualify as investing, buying multiple condominiums with minimal down payments for the purpose of reselling them quickly at a profit would undoubtedly be regarded as speculation.
Speculators can provide market liquidity and narrow the bid-ask spread , enabling producers to hedge price risk efficiently Speculative short-selling may also keep rampant bullishness in check and prevent the formation of asset price bubbles through betting against successful outcomes. Mutual funds and hedge funds often engage in speculation in the foreign exchange markets as well as bond and stock markets.
This market trades around the world for 24 hours a day while positions can be taken and reversed in seconds, utilizing high-speed electronic trading platforms. This market is dominated by asset managers and hedge funds with multi-billion-dollar portfolios.
Speculation in the forex markets can be hard to differentiate from typical hedging practices, which occur when a company or financial institution buys or sells a currency to hedge against market movements. For example, a sale of foreign currency related to a bond purchase can be deemed either a hedge of the bond's value or common speculation. These relationships can get complicated to define if the currency position is bought and sold multiple times while the fund owns the underlying bond.
Asset prices can fluctuate greatly and are strongly influenced by interest rate movement as well as political and economic uncertainties. The largest single world market trades U. Treasuries, with prices in that venue often driven by common speculation. Investing Essentials. Some currencies are considered safe havens compared to others.
In volatile markets, investors and currency traders may seek to convert holdings of cash into these currencies for protection. The Swiss franc is considered a safe haven currency. Given the stability of the Swiss government and its financial system, the Swiss franc usually faces a strong upward pressure stemming from increased foreign demand. Switzerland has a large, safe, and stable banking industry, low-volatility capital market, virtually no unemployment, high standard of living, and positive trade balance figures.
In addition to the Swiss franc - and depending on the particular challenge the market is facing - the euro, the Japanese yen and the U. Often the U. The assets listed above are not guaranteed to maintain their values during periods of market volatility. Furthermore, what constitutes a safe haven changes over time. For example, if an entire economic sector is performing poorly but one company within that sector is performing well, its stock could be considered a safe haven.
Investors should carry out due diligence when looking to invest in safe havens, as an asset that is considered a safe haven in a downturn may not necessarily be a good investment when the stock markets are rising. Metals Trading.
Monetary Policy. Your Money. Personal Finance. Your Practice. Popular Courses. Investing Investing Essentials. What is a Safe Haven? Key Takeaways Safe haven investments offer protection from market downswings. Precious metals, currencies, stocks from particular sectors and more have been identified as safe havens in the past.
Safe havens in one period of market volatility may react differently in another, so there is no consistent safe haven other than portfolio diversity. Article Sources.
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