Items by Busolo

Concept Advisory Services

• On Stock’s Speculation

  Posted: April 18, 2008, 8:39 pm by Busolo

  The synonyms for speculation include rumors, gossip, assumption, guesswork, and hearsay. According to Investopia, an online tool for investors, financial speculation is no different from the definitions above and involves buying, holding, and selling of stocks, currencies or any financial instrument to profit from its fluctuations in price as opposed to buying it for use or for income via methods such as dividends or interest.

   

  A degree of speculation exists in a wide range of financial decisions, from the purchase of a car to a bet on a horse.

   

  A speculative stock is one that has the probability of increasing in value over a short period, thus offering investors above average returns. The lure of these returns entices many investors to buy. Those who believe a share will appreciate without performing a detailed analysis often purchase speculative stocks.

   

  At the Nairobi Stock Exchange, stocks that qualify as speculative include Mumias, KenGen, Eveready, Kenya-Re and HFCK in the financial category. These stocks trade in high volumes, they have a high PE, and a small movement can result into huge gain or loss.

   

  Most people lose money in speculation while those who make money tend to become professionals. Speculation is not a one off event and majority of speculators will admit to having done it over a considerable period. By definition, most long-term investors even those who buy and hold for decades may be classified as speculators except only the rare few who are not primarily motivated by eventually selling at a good profit.

   

  Speculators risk their own capital in the hope of making a big profit and they add liquidity to the market making it easier for others to offset risk. Let me explain. When they is a rumor of a stock appreciating and supply is low, speculators come in hoping to profit from the scarcity by buying. Their purchase fuels demand on the share and the share price rises. At this point, a keen investor who had bought an overpriced stock has an opportunity to get out.  On the other hand, when the price is higher than the speculator thinks the facts warrant, they sell. This reduces prices. As it happened in January when majority of retail investors were opting out, foreigners and institutional investors cashed in on the low priced stocks.

   

  The quality requirements to buy speculative stocks due to the high risks is to have a strong stomach, you have to be capable of sleeping well at night under any circumstances. These stocks may provide you with great capital earnings or losses.

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