I honestly don't understand why any speculators get bailed out ever. They're in it for above-market profits, how is it that they don't have to accept the risk?
My understanding is the "speculators" create liquidity for the risk managers, thereby assuming their risk.
Why does the money leaking via commissions necessarily make the game sub-zero sum? Is it because we aren't looking at the big picture where everyone wins?
It seems like the risk managers must have a positive incentive to sell their risk on the marketplace instead of assuming it themselves. I.e. hedging another investment like someone else said already.
Hmm. Speculators choose to avoid a market which they feel is highly risky. For this, you believe they are con artists.
Similarly, any person who doesn't put their retirement fund into junk bonds and penny stocks is also a con artist. After all, they are avoiding risky markets!
The problem isn't that speculators make money per se, its when speculation becomes a feeding frenzy that jacks up the market to insane numbers. See places like Vancouver where rich foreign investors dump millions into the market to have a safe haven for their money, and don't even bother to rent it out. Why would you bother when you get double digit returns YoY by just sitting on it.
Ok, that sounds like a more convincing argument than the original one.
Speculators are risking their own money re-aligning badly-allocated capital in the economy and correct prices. If they are right they earn a nice commission.
I still don't get it. If people are buying and the value is not there, they will loose money, right? Speculators can also bid on a lower price (derivatives), right? So, who are all those crazy people bidding only in 1 direction (higher prices)?
The same people who always take the losses - speculators. Some of them are the same people who bid the market up; some of them are people who foolishly bought at the top.
Speculators usually earn a premium over what they would get via blind luck. If they didn't, there would be no speculators.
The reason why trades occur at all is that not everyone is a pure trader. Hedgers (e.g. Southwest) trade futures to reduce business risk rather than to make money. They tend to make a net loss on trading but earn back a greater amount of money via their core business.
to the extent that the market needs speculators, I think it is part of the "goal" of capital markets. a market of only long-term risk-averse allocators wont have the liquidity necessary to create fair prices nor is it likely to attract as much capital when companies issue shares, as a market that has a "healthy" amount of speculation.
There are tens of thousands of consumers and tens of thousands of producers for many commodities. Each of them have different cash flow demands and different tolerances for risk. All of them operate in a world that creates risk.
Sure, products could still be moved without all the market's actors. But they'd move at inferior prices, jackpotting some producers and bankrupting others by sheer chance with little opportunity for smart producers to mitigate (or even profit from) risks.
Even pure speculators serve a purpose in the market; if nobody wants to hedge a risk or lock in a price by dealing with them, they can't succeed; if people do want to do that, the speculator is providing a service to them.
This, by the way, isn't any great insight on my part; it's the first chapter in any book that explains futures and options.
reply