# Understanding Speculators: Definition, Types, and Market Impact

## What Is a Speculator?

A speculator is someone who utilizes different strategies and a shorter time frame in an attempt to [outperform](https://www.investopedia.com/terms/o/outperform.asp) traditional, longer-term investors. Speculators attempt to manage long-term risks through strategies like [position sizing](https://www.investopedia.com/terms/p/positionsizing.asp), [stop loss orders](https://www.investopedia.com/terms/s/stop-lossorder.asp), and monitoring the statistics of their trading performance.

Individual traders, market makers, and trading firms can be speculators, but generally, they are more sophisticated risk-taking individuals with expertise in the markets in which they trade. 

Often, speculators are thought to be similar to gamblers, taking unplanned risks and trying to beat the odds with hunches or feelings. In some cases, they can be and do, but true speculators utilize proven trading strategies to achieve profitability.

### Key Takeaways

*   Speculators seek to profit from short-term price changes, often using strategies that involve significant risk and sophisticated market analysis.
*   By bringing liquidity to the markets, speculators play a critical role, although their actions can sometimes lead to speculative bubbles with unsustainable price increases.
*   Speculation is differentiated from gambling by the use of tested strategies aimed at identifying market patterns and making informed trades.
*   Despite the potential for large profits, speculators can also face significant losses due to the high-risk nature of their trades, contrasting with investors who typically pursue long-term gains with lower risk.
*   Market speculation is legal, but regulatory bodies may intervene if speculative trading leads to extreme or unwarranted market fluctuations.

## How Speculators Operate in the Market

Speculators attempt to predict price changes and extract profit from the price moves in an asset. They may utilize [leverage](https://www.investopedia.com/terms/l/leverage.asp) to magnify returns (and losses), although this is a personal choice of the individual.

There are different types of speculators in a market. For example, individual traders can be speculators if they purchase financial instruments for short periods of time with the intention of profiting from their price changes.

[Market makers](https://www.investopedia.com/terms/m/marketmaker.asp) can also be considered speculators because they take the opposite position to market participants and profit from the difference in bid and ask spreads. [Prop shops](https://www.investopedia.com/terms/p/prop_shop.asp) or proprietary trading firms can also be considered speculators because they use leverage to purchase securities and make profits from changes in their prices.

Normally, speculators operate in a shorter time frame than traditional investors.

For example, a person may call themself an investor if they buy 20 strong companies and plan to hold those stocks for at least 10 years, assuming the companies continue to perform well.

Conversely, a speculator might invest all their capital in a few stocks or contracts, hoping they rise soon. Speculators use [trading strategies](https://www.investopedia.com/terms/t/trading-strategy.asp) to decide when to buy, sell, and determine position size.

## Key Principles of Successful Speculation

Speculation sometimes gets confused with gambling. There is an important distinction, though. If traders use untested methods based on hunches or feelings, they're likely gambling. If gambling, the trader is likely to lose over the long run.

Profitable speculation takes a lot of work, and with proper strategies, it is possible to gain a reliable edge in the marketplace.

Successful speculators spot repeating [patterns](https://www.investopedia.com/terms/c/continuationpattern.asp) and common trends to profit from future price changes. Speculating is detailed work, with endless variables and moving prices, leading each speculator to develop a unique trading style.

## The Influence of Speculators on Market Dynamics

If a speculator believes that a particular asset is going to increase in value, they may choose to purchase as much of the asset as possible. This activity, based on the perceived increase in demand, drives up the price of the particular asset.

If this activity is seen across the market as a positive sign, it may cause other traders to purchase the asset as well, further elevating the price. This can cause a [speculative bubble](https://www.investopedia.com/terms/s/speculativebubble.asp), pushing an asset's price above its real value.

The same can be seen in reverse. If a speculator believes a downward [trend](https://www.investopedia.com/terms/t/trend.asp) is on the horizon, or that an asset is currently overpriced, they sell as much of the asset as possible while prices are higher. This act begins to lower the price of the asset. If other traders act similarly, the price will continue to fall until the activity in the market stabilizes.

In this way, even many investors become speculators from time to time. They get caught up in the frenzy of the big ups and downs. While they may have initiated their position with the intention of being long-term investors, if they start to buy and sell solely because they think other people are buying or selling, they have entered the realm of speculation—possibly even gambling, if they are unsure of what they are doing—as opposed to investing.

## What Is a Speculative Investment?

A speculative investment is one where an investor seeks to profit from a rapid change in an asset's price. The investment time frame is short and usually comes with high risk. Speculative investments can be made in all financial markets, such as stocks and foreign exchange, as well as in art and collectibles.

## What Is the Difference Between a Speculator and an Investor?

Investors take a more pragmatic and methodical process in choosing investments, typically with a medium to low level of risk with a long time horizon. Speculators seek to quickly gain profits via a rapid change in an asset's price over a short time frame. Their investment strategies typically come with higher risk.

## Is Market Speculation Illegal?

Market speculation is legal, but per regulatory bodies, if speculation causes "sudden or unreasonable fluctuations or unwarranted changes in the price," then limits on speculative trading may be placed by the regulatory body.

## The Bottom Line

Speculators use short-term strategies and high levels of risk to try to beat the market. Their risk-taking activity lends liquidity to the market, but can also contribute to price bubbles. They stand in contrast to investors, who take a more methodical approach to making profits in the markets over a longer period.

Speculators use strategies like position sizing and leverage to manage risk and maximize returns on short-term market movements; however, these strategies can lead to significant losses as well as rapid gains.

It's essential for anyone considering becoming a speculator to understand that speculation requires knowledge of trading strategies and market dynamics rather than recklessly betting on price movements.

> **Article Sources**
>
> 1.  CFTC. "[Speculative Limits](https://www.cftc.gov/IndustryOversight/MarketSurveillance/SpeculativeLimits/speculativelimits.html)."