Following the stock market for any length of time will show you how share prices rise and fall, just as the value of major indices rises and falls. Stock prices change for many different reasons, one of which is speculation. When investors speculate on stock prices, their hopes that prices will rise can actually help make this a reality. However, the effects of speculation are short-lived.
In the context of the stock market, speculation refers to buying shares of a specific company in hopes that the shares will rise in price, allowing the investor to sell them for a profit. Speculation is generally a short-term type of investing, which comes with a great degree of risk. If prices fall instead of rising, the investor stands to lose money. The investor might end up holding stock that is worth less than she paid for it, waiting for it to rise in value at some point in the future.
Effect on Share Price
Other than having specific intentions, speculation is no different from other forms of stock market investing. It simply consists of buying stock. Purchasing shares shows demand for that specific stock. It also reduces the number of shares that remain available for sale. This shift in supply and demand can, on a large enough scale, raise share prices on its own.
Some stock speculators are individual investors, but others are major fund managers, well-known business leaders and other types of financial mavens. When one of these people speculates by buying stock, it signals to other investors that the speculator expects share prices to rise. This can create an increase in demand as others rush to buy the same stock. While the speculator may not count on this type of reaction, it may lead to the intended result of raising share prices, perhaps higher and faster than the speculator anticipated.
Speculators hope for a quick rise in share prices so they can sell for a profit. They do not necessarily think they are buying stock for less than its true value or that the price will continue to rise after they sell. This means that speculation can have a dangerous result for investors. Following a speculator by buying late, when the share price has already begun to rise or has approached its peak value, can result in a loss. Buying at a low price but waiting too long to sell can also have negative consequences.
- stock market image by Sydney Alvares from Fotolia.com