A lot of folks will be transformed into angryand annoyed intellectual after reading the topic of my article. And they willhave to be placed over some liquid refreshments to bring their temper down. Butthat's alright as this whole routine is something we have been exercisingfor many years now.Dictionary meaning of Speculation is 'engagement in business transactionsinvolving considerable risk but offering the chance of large gains, esp.trading in commodities, stocks, etc., in the hope of profit from changes in themarket price.'In my view, Speculation is a state of mind. The only difference between aninvestment and speculation is not what an investor does but to what hewants and what his level of knowledge is. For example, Someone tells youthat X stock is going to go up and you just go ahead and buy it withoutany further research. By comparison, someone else could know everything aboutX, it's prospects, the industry, it's peers and come to the conclusion thatit's a good buy. Clearly, the very same action, depending on how much an investorknows, could be intensely speculative or could be a carefully consideredinvestment.A carefully taken decision not only reduces the risk of loss but it also givesyou a confidence to hold on to your stock if there is a fall in the overallmarket. There is nothing wrong in checking the calls of various financialadvisors on TV or in some but you must do your own research andcheck all the important details of company, its competitors, valuations, futureprospects et cetera.Are you, in this sense, a speculator? Here are a few checkpoints. The more ofthese you answer yes to, the closer you are to being a speculator:a) You never try to balance risk between different investments.b) You buy stocks of companies without a clear idea of how their businesseswork.c) You choose which new issues to invest in based on the ads of those newissues.d) You buy stocks because they've gone up.e) You sell stocks because they've gone down.f) You think a stock with a lower price is cheaper than one with a higherprice.g) You think the previous checkpoint is a mistake.h) You answered yes to most of these checkpoints and yet you are sure you arean investor and not a speculator.
Imagine a world a world in which either all investors have costless access to currently available access about the future , all investors are good analysts , all investors pay close attention to market prices and adjust their holdings appropriately and that all investors pay close attention to market prices and adjust their holdings appropriately.
Do you believe in the Tooth Fairy?
In such a market a security's price would be a good estimate of its investment value, where investment value would be a good estimate of its investment value, where investment value is the present value is the present value of the security's future estimated by well informed and capable expert analysts.
An efficient market could be defined as a (perfectly) efficient market would be one in which every security's price equals its investment value at all times.
In an efficient market, a set of information if fully and immediately reflected in market information. But what information?
For example, a market would be described as having weak-form efficiency if it were impossible to make abnormal profits by using past prices to make to make decisions about when to make abnormal profits to buy and sell securities. This evidence suggests that major security market is weak-form efficient.
In an efficient market, any new information would be immediately and fully reflected in prices. New information is just that: new, meaning a surprise. Since happy surprises are almost as likely as unhappy ones, price changes in an efficient market are about as likely to be positive as well as negative. Whereas a security's price might be expected to move upward by an amount that provides a reasonable return on capital (when considered in conjunction with dividend payments), anything above or below this would, in such a market, be unpredictable. In a perfectly efficient market, price changes would be random?
Now consider a crazy market, in which the prices never bear any particular relationship to investment value. In such a world, price changes might also appear to be random. However major securities markets throughout the world are certainly not irrational. They might not attain proper efficiency, but they are certainly much closer to it than irrationality. To understand financial markets m it is important to understand perfectly efficient markets.
In an efficient market a securities price will be a good estimate of its investment value where investment value is the present value of the security's future prospects as estimated by well informed and capable analysts. Any substantial disparity between price and value would reflect market infancy. In a well developed and free market, major inefficiencies are rare. The reason is not hard to find. Major disparities between price and investment value will be noted by alert analysts, who will take advantage of their discoveries. Securities priced below (which are known as under priced or undervalued securities) _ will be purchased, creating pressure of price increases die to the increased demand to buy.
Securities purchased above value (known as overpriced or overvalued securities) will be sold, creating pressure for price decreases due to the increased supply to sell. As investors to sell.
As investors seek to take advantage of opportunities created by temporary inefficiencies, they will cause the inefficiencies, they will cause the inefficiencies to be reduced, denying the less alert and less informed the chance to obtain large abnormal profits.
In the world securities markets there are hundreds of thousands of professional security analysts and even more amateurs and wannnabees.
Not surprisingly, due to their actions the major worldwide securities markets appear to be closer to efficiency than to irrationality.
Therefore as a result it is extremely difficult to make abnormal profits by trading securities in these markets.
One should strive for regular consistent growth ? "the tortoise rather than the hare "in one's careful and insightful investment strategy and implementation ...
Both Lavanay Rajput & Amy Goodmann are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Lavanay Rajput has sinced written about articles on various topics from Fitness. Lavanay is a blogger/writer whowrites on and on Stock Recommendations in India. Lavanay Rajput's top article generates over 590 views. to your Favourites.
Amy Goodmann has sinced written about articles on various topics from Gardening, Feng Shui and Home Improvement. Amy GoodmannSenior AnalystCurrency Investment Transactionsfrxforex@yahoo.comwww.forexforexforexforex.com. Amy Goodmann's top article generates over 8100 views. to your Favourites.