It is easy to blame traders for any market woes or price moves. Truth is that we ALL speculate to make money. Speculators are investors like you and I that actually make the financial markets more efficient.
The positive result of speculation is to lower the prices of resources and consumer goods for everyone worldwide.
Your neighbor dentist that buys 100 shares of a growth stock is hoping to profit from the stock price appreciation maybe next week or in retirement. Trading firms, hedge funds and banks, which now account for more than 60% of the daily exchange volume, buy and sell shares with no intention of taking controlling interest of the company to manage it.
Profit is the sole motive for most market participants.
The same forces that Sold, Sold, Sold during the financial crisis may have been buyers in the prior market rocket rise. Investors that are right and wrong have to balance the risks and rewards for success. Capital is on the line with whatever their positioning may be.
Nobody ever complained about too cheap prices when Crude Oil dropped from $148 to $33 on speculation of the global slowdown.
Recent knee jerk government legislation to rein in "Speculation" is misguided and actually harmful for many reasons. The recent market crash was largely due to the fact that excessive non exchange regulated products were outside the access of the public and speculators. In reality more speculation benefits all participants and consumers as a whole.
Speculation Is Not a Dirty Word
1) Price Discovery
A centralized exchange performs the vital function of distilling all of the market information into one output, PRICE. The buying and selling order flow determines that equilibrium and true investment value. The more shares, contracts, or options traded means opinions from informed money around the world wants to participate because they envision a future price rise or fall for profit. At any time it is know precisely what something is actually worth.
The dramatically increased participation of traders today in the financial markets has had a profound positive effect. Stocks are no longer traded in a 1/8 of a dollar increment which has been reduced to penny Bid/Ask spreads. The actual liquidity trading costs are significantly lower and now allow more efficient execution of a trading plan.
Most importantly this has led to lower risk because the market entry and exit cost is now seamless with this amazing liquidity. When you want to get in there are those who want to get out and the sale collary also of when you want to exit plenty of buyers want to get in. With more buyers and sellers the school of fish safety lessens a proverbial shark attack on any one individual position.
Exchange-traded product transactions are visible for all to see. That also means that the current price is disclosed to the marketplace for judgment of under or over value. This transparency allows investors to buy/sell if their information tells them price is too high or too low. These dynamic votes through participation are for everyone to see.
The push to limit speculator positions ignores the successful many decade long regulation in place that has always required reporting limits. The exchanges know exactly who has what big positions at any time. Remember a big position is not necessarily a correct one. Limiting speculation will only force business to the wild west Over The Counter Market that lacks transparency or the ability to easily measure true value.
4) Shift Risk/Hedging
Another primary function of the exchange is to shift price risk. A farmer or producer uses the market to control the price risk of goods that they will sell or buy in the future. They lock in prices from future moves that could be negative and therefore can determine the revenue or expense for down the road financial price projections.
Shifting price risk is the reason hedgers use the marketplace. They need speculators to provide the liquidity for their plan. The value of commodities and resources, money and interest rates also, fluctuate based on supply and demand. Any successful business needs to be able to manage that volatility and that's what the exchange is for.
5) Reduces Consumer Cost
Imagine if the speculators are eliminated that take the other side of an Airline fuel hedge, the impact would disrupt price efficiency to the point it would not be possible. Without the ability to control future prices all costs would rise to factor in potential risks. The box of cereal, electricity from natural gas, and interest on a mortgage would jump because of price uncertainly
The real threat of rising prices is collective global economic success. With a world of 7 Billion people at the end of October the demand for commodities continues to grow. The emerging market countries are beginning to become major consumers and add to the want of finite resources.
Price is not necessarily what something is worth but rather a measure of what someone is willing to pay. The positive role that speculation plays in the marketplace cannot be ignored. Stand proud that we SPECULATORS contribute to lowering costs for the benefit of all of society.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV