Speculation is the Purchase of an asset, with the hope to resale at a higher price or Sale of an asset ,with the hope to repurchase at a lower price, with expectation to make profit from the changes in price.
Speculation is very risky. For instance, prices can fall after you bought the asset, thereby you will lose money and may not be able to sell it at higher price. Similarly, the price may rise after you sold the asset, thus you won’t be able to buy it back and also lose the extra income you would have made.
Let’s picks two stocks from the Nigerian Stock exchange (NSE) for example – International Breweries Plc (NSE ticker – Intbrew) and Seplat Petroleum Development Company Ltd (NSE ticker – Seplat), both companies reported loss for the first half of 2020 ended 30 June 2020.
The share price of International Breweries Plc was N3.40 per share, at the time it released its report while Seplat stood at N282.00 per share at the time of its own release. The share price of both companies has been on steady decline prior to the release of the results.
Let’s assume that a speculator sold both shares upon the release of the H1 results, with the hope of repurchasing once the prices decline due to the poor financial performances.
- Read more; International Breweries Plc poor financial performance worsens in H1 2020
- Seplat immersed in Deep Loss despite receiving over N12bn tax credit in H1 2020
He/she would have made good profit from selling Intbrew, because the share price has declined by 15.71% as at the close of trading on Friday, with the share price settling at N2.85 per share.
On the other hand, he/she would be recording huge loss on Seplat, as the share price has appreciated by 26.75% since the release of the financial reports, following the confirmed retirement of Austin Avuru as the company CEO. The share price stood at N385.00 at the close of trading on Friday.
Similar scenario as shown above can equally apply to the purchase of an asset. Whereby the price either rises or falls after purchase. Therefore speculation has its good side – if your plan worked you will make huge profit and bad side if it doesn’t you suffer great loss.
Speculation is perceived as a negative, destructive activity which is often reported as being responsible for instability in the financial markets.