SPECULATION

Speculation is an economic term used to describe financial risk taking. For example, an individual investing money in a start-up business venture, where the outcome of profit or loss is unknown, is engaging in speculation. A speculator can calculate a variety of factors and forecast a possible result for an investment, but performance outcomes can never be definitively determined. To continue with the example of a start-up venture, the performance of the new business can be estimated through market studies regarding consumer demand for a product and how that demand is or is not presently being met in the marketplace. The start-up business may predict that its product is innovative and will quickly find a niche in the market, generating profit for the company. If this is true, the analysis proves accurate. However, if the economy experiences an economic downturn and enters into a depression as the business opens, the needs of the marketplace may change and the outcome may result in loss.

Speculation may be compared to gambling. However, the two are not the same. Gambling is an artificial form of risk taking and has no relation to business operations or market forces. Speculation relies on the marketplace and is subject to the whims of the economy. Speculation may also be confused with investment, which also takes place in the marketplace and is subject to the ups and downs of the economy, but these are also not the same. Investment involves a limited risk of capital and is usually designed to make a profit over the long-term. Speculation often involves larger amount of money and attempts to achieve a high profit in a short time frame.