Speculation areas

Convention - and especially satire - sometimes depicts speculators comically as speculating in pork bellies (in which a real market and real speculators exist) and often "losing their shirts" or making a fortune upon small market changes. Speculation exists in many such commodities but, if measured by value, the most important markets deal in financial futures contracts and other derivatives which involve leverage that can transform a small market movement into a huge gain or loss.

Type of speculators

Most non-professional traders lose money on speculation, while those who do make money tend to become professionals. Occasionally some dramatic event will occur such as the effort of the Hunt brothers to corner the silver market or the currency speculations of George Soros.

By some definitions, most long term investors, even those who buy and hold for decades, may be classified as speculators,^{[citation needed]} excepting only the rare few who are not primarily motivated by eventually selling at a good profit. Some dedicated speculators are distinguished by shorter holding times, the use of leverage, by being willing to take short positions as well as long positions (in markets where the distinction can be reasonably made). A degree of speculation exists in a wide range of financial decisions, from the purchase of a house to a bet on a horse.

The economic benefits of speculation

The service provided by speculators to a market is primarily that by risking their own capital in the hope of profit, they add liquidity to the market and make it easier for others to offset risk, including those who may be classified as hedgers and arbitrageurs.

For example, if a certain market - say in pork bellies - had no speculators, only producers (pig farmers) and consumers (butchers etc) would participate in that market. With fewer players in the market, there would be a larger spread between the current bid and ask price of pork bellies. Any new entrant in the market who wants to either buy or sell pork bellies will be forced to accept an illiquid market and market prices that have a large bid-ask spread, or might even find it difficult to find a co-party to buy or sell to. A speculator (e.g. a pork dealer) may exploit the difference in the spread and, in competition with other speculators, reduce the spread thus creating a more efficient market.

Another example of the value of speculators is the ability of a pig farmer to sell his pork on a futures exchange at a known price ahead of its production.