What is Speculative Investing?

If you have ever read or seen a trader strike it big through a large trade, you were likely jealous of their financial standing after the trade. Some of these big-winner trades were the result of speculative investing, a form of investing that involves high risks in exchange for the potential to earn high returns. Let’s take a look at speculative investing and help determine if it could be a good fit for you.

How Does Speculative Investing Work?

Speculative investing is a trading strategy that involves taking high risks with the expectation of making high returns. However, speculative investing also could result in large losses for the investor. Speculative investing is also often done in a short timeframe. Additionally, speculative investments can be leveraged to increase exposure to the underlying assets as well as investing in assets that are naturally volatile and therefore carry more risk. 

Examples of Speculative Investments

Let’s jump into some examples of the most popular speculative investments.

Forex Market

The foreign exchange or forex market is the largest financial market in the world. It allows for parties to trade and invest in different currencies in pairs. Traders can speculate on the relative price of different currencies through cash investing, derivatives and swaps. Since the forex market is so large, it moves fast and can be very volatile. Additionally, with the use of derivatives and other leverage instruments, this volatility can be exacerbated, causing gains and losses to be heightened. 

Bond Market

The bond market consists of U.S. Treasury bonds, as well as corporate bonds. Bonds are fixed-income instruments that pay a fixed or variable interest rate. They are issued as a way to generate capital for governments and firms, but they also trade on a secondary market. In the secondary market, bond prices are impacted by interest rates, credit ratings and company news. Additionally, the secondary market is not very liquid, so news events can cause large price swings. On top of this, derivatives and other leveraged instruments can make these swings even more extreme. 

Cryptocurrency

Cryptocurrency is a digital asset that is secured on an unalterable ledger that stores information, called the blockchain. The blockchain is spread out across many computers to create a non-centralized network. In terms of the currencies themselves, they are often extremely volatile, as there is not a lot of regulation and it can be difficult to determine which projects are legitimate. Because of this, the markets move extremely fast and offer the ability to generate large losses or gains. 

Precious Metals

Precious metals investing is one of the oldest and most popular forms of speculative investment. Previously, you had to buy the physical metals (gold, silver, etc.). However, markets have evolved and now it can be done entirely online. The precious metals market also moves quickly and can be volatile during times of uncertainty. Additionally, leverage can be applied to increase exposure. 

Potential Rewards of Speculative Investing

Speculative investing offers the potential for high rewards. If done correctly, speculative investing can provide high returns in a timely manner. Additionally, the communities that trade these products are often tight-knit and seek to help each other with the trading journey. Here is a list of potential rewards for speculative investors:

• High returns
• Quick gains
• Thrill of risky investments
• Niche communities

Risks Associated with Speculative Investing

While speculative investing can be profitable, it also comes with high risk. These risks can range from market risks to legal and ethical risks, such as fraud. Additionally, some markets require memberships to trade (some bond derivatives), which can be very expensive. 

• Market volatility 
• Lack of liquidity
• Potential for fraud
• Potentially high barriers to entry

Factors to Consider in Speculative Investing

Now that you have the basics of speculative investing, let’s take a look at some factors to consider before beginning speculative investing.

Personal Financial Situation

When trading speculative assets, a good rule of thumb is that you should be fine financially if you were to lose all of your investment. That is, it is probably not a good idea to put your life savings into a speculative investment. If you have a strong financial situation, meaning that you have savings to cover emergency expenses and stable income then it could be a possibility to look into speculative investments, as the worst outcome of losing the investment would not be the end of the world.

Investment Goals

Another important factor to consider is that of investment goals. Before engaging in speculative investing, you should ask yourself how long you plan to invest, how much you are hoping to make and how much you want to risk. Depending on the answers to these questions, you can get a better idea if speculative investments could be a fit for your unique goals. 

Risk Tolerance

Speculative investing is not for the faint of heart. There are extreme price movements, and your account value can rapidly change. If you are willing to stomach these movements and potential losses, then speculative investments could be a possibility. If you are afraid of the price movements and the impact on your account value, then speculative investments may not be for you. 

Long-Term Sustainability of Investments

It is difficult to make a living as a trader because it is hard to sustain profits over a long period of time. Most people who trade speculative assets usually do not make money. If you are looking to find a source of income or trade for a living, the odds of trading speculative investments are not in your favor. If you are looking for long-term growth and security, traditional investments may be a better option. 

Balancing Speculative Investments in a Portfolio

While it may not be a good idea to only trade speculative investments, it can be incorporated into an overall investment portfolio to help balance out the risks associated with speculative investments. Additionally, it can help diversify your portfolio and spread out risks.

Speculative Investments vs. Traditional Investments

Here’s a table with the main differences between speculative and traditional investments.

Speculative Invests: High Risk for Potentially High Returns

Speculative investments offer high risk in exchange for the possibility of high returns. On the flip side, they also offer the possibility of high losses. Because of this, they are not intended for beginner investors or those who are not able to handle the risks associated with the investments. 

Frequently Asked Questions