Notes On Advantages And Disadvantages Of Speculation:

Speculation has become a popular investment practice of investors and even business entities to either earn from profits or hedge and manage risks. However, along with its positive impacts and benefits, speculation has its share of disadvantages and risks.

Advantages Of Speculation:
  1. Liquidity, mobility and price continuity. It makes the market broad-based.
  2. It makes the price uniform, stable and minimizes the risk of price fluctuations.
  3. Speculation enables diversion of savings and flow of funds into productive channels.
  4. Speculators acts as an insurer by providing price insurance or hedging services.
  5. Speculation is responsible for rational and optimum utilization of scarce natural resources.
  6. Speculation provides the needed liquidity and marketability to securities so that savings can be converted into investment and capital investment is made easy and smooth.
Disadvantages Of Speculation:
  1. A speculator, by virtue of his ability can influence the prices of securities in the market. This manipulation may not be healthy.
  2. Speculation facilitates wash sales wherein one fictitious dealings are carried out by one broker to another at artificially created higher prices. This misleads the other brokers.
  3. Speculator gives different orders to different brokers. Some for buying and some for selling. This stirs the market and the markets price appears what is predetermined by the speculator.
  4. Bulls monopolise the supply and bears must deliver within a certain period or submit to ruin.
  5. Speculation also involves price gambling by means of fictitious purchases and sales. The dealing is done simply in profits or losses and not in commodity itself.