Active traders tend to be speculative investors and aren’t as prominent among those who take a “buy-and-hold” approach.

Speculation is the act of buying or selling assets that have an increased chance of significant losses.
Speculation is common among investors who trade penny stocks and over-the-counter (OTC) investments.
Speculation should be limited to ensure that long-term financial goals like retirement are not impacted.

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The bulk of investing advice, especially for those interested in retirement centers, are around slow and consistent gains over decades. But not every investor is content with the prospect of patient long-term gains. Some would rather aim for the home run trade – a move that could change their fortunes overnight. This is known as speculation and it doesn’t come without significant risk.

What is speculation?

Speculation is the act of buying or selling assets that have an increased chance of significant losses. As speculative investors take on more risk, there’s an expectation to achieve extraordinary returns which – in the mind of speculators – is compensation for the outsized risk.

Speculative investors tend to be active traders. This means that they’re attempting to beat the market average and have more of a hands-on approach, especially during short-term swings in the market. This is a stark contrast to more passive, buy-and-hold investors who generally have more of a hand-off approach and do not adjust their investments as often.

The decision-making process for speculative investors can vary wildly in terms of sophistication. Some speculators base their investing decisions on social media groups and memes. This was, and still is, the primary driver behind the surge in stock price for companies like GameStop and AMC Theaters. Both companies were mired in financial trouble and at different points rumoured to file for bankruptcy prior to 2021.

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Another example is Dogecoin, a cryptocurrency that saw massive spikes earlier this year when celebrities like Mark Cuban and Elon Musk discussed it on Twitter. After Elon Musk’s Saturday Night Live appearance on May 8, 2021, Dogecoin fell more than 30%. A series of Musk’s tweets were also blamed for the volatility in Bitcoin when Tesla announced it would take Bitcoin as a form of payment in February – only to reverse that decision in May and deciding again that the company will accept Bitcoin in June. In April, the price of Bitcoin was slightly above $65,300 which is significantly more than the current price of Bitcoin at $33,600 at the time of writing.

Other speculators base their decision on a “hunch” or market volatility, says Sabina Smailhodzic Lewis, CFP® and co-owner at Avant-Garde Wealth. “They’re looking for pieces of information that scream potential to them and risk to everyone else,” she added.

Nearly every market has a speculative corner, but in today’s investing environment, cryptocurrencies followed by NFTs (non-fungible tokens) are likely …read more

Source:: Business Insider


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