How does speculation work?

Question

How does speculation work? I keep reading articles about the high price of oil being blamed on speculators. I have several questions about that:

1. What exactly are the speculators doing to make oil go up?

2. Are the speculators making money from oil going up?

3. How do I become a speculator?

Answer 1

Speculators do not make the price of oil go up. It's supply and demand--economics. Supply of oil is limited, and since demand for oil is high, it is normal for the price of oil to go up.

Speculators are the big corporations who hoard oil knowing its price will go up in the future. By doing this, they too, limit the supply of oil in the market, hence ensuring their profits.

I don't think that's the type of speculator you had in mind, but a TRADER. One who trades in a financial market. If so, you can sign up for an online trading account to trade the instrument of your choice.

Be warned though. Not every one who trades will not be successful. In fact, 8 out of 10 newbie traders will bust their account within 12 months.

It takes at least 3 years and a lot of money to get past the trader's learning curve and start to make money.

Hope this helps.

- Jim http://jsforex.blogspot.com

Answer 2

Traders are called speculators when rising prices are unpopular, such as commodity prices.  And traders are called investors when rising prices are popular, such as stock market prices.

But regardless of what you choose to call them, they are all doing basically the same thing.  These people try to predict future economic conditions and their effect on prices.  And they buy or sell financial securities according to their expectations.

Usually, big price movements occur when a lot of securties are bought or sold in a short period of time.  Which usually occurs when big mutual funds or hedge funds change their positions in the market under time pressure.

It's easy to become a speculator.  All you need is some money to speculate with.  But it's not so easy to become a successful speculator.  Most aspiring speculators loose money and fail.  Only a few succeed.  Because it's not so easy to predict the future well.

Answer 3

Speculators, also traders, they buy a product (commodity) at one price and hoping to sell it later at higher price.  They are not really driving the price higher, the end users are out there trying to buy the commodity at the best price they can, and when you have buyers the price always goes higher.

The demand for oil is greater than the supply, so more buyers equate to higher prices.   The speculators are buying oil today hoping to sell it later.

HOWEVER, not all speculators are making money, remember for every buyer there is a seller, yes the speculators are buying up the oil, but there are other selling at this price.

Most trades/speculators are on the floor of the exchange, or their trade in house for the firm.

So to be a a speculator, assuming your talking about the commodity of oil, you have to have an exchange membership, be registered with the SEC, CFC, and meet the capital requirements and have proper insurance.  (this will require about $1 million).

Or you could try to get hired by a commodities firm to become a trader, you must have extensive trading experience you'll be clerking for a long time.

Every one is trying to find a scape goat for rising oil prices, the Liberals are blaming the oil companies and speculators, but they reality is the fault for the oil crises here in the US, lives solely with the Congress, who has banned the drilling of oil on US soil.

Answer 4

Speculation is a bit of a misnomer:  in the press "speculator" is being used mostly as a synonym for "mean, rich, jackass."  The press is simply pointing fingers in a rather unhelpful way.

In truth, speculators in the truest sense of the word in finance make the world go round.  When one person needs to take one position in a financial trade and they cannot find someone else who needs to take the other side, speculators step in and take that position as a gamble that it will pay off in the long run.  The price they demand for this service is usually high:  they do not need the gamble, they are being paid to do it.

So speculators are the paid gamblers in the financial system.

1. I think the evidence that speculators are "the cause" or "the major cause" is rather flimsy.  In part for the very reason you are asking the question:  where the h**l is the evidence?  It is slim.  The best evidence is that the GENERAL PUBLIC speculating through the use of mutual funds and other financial tools IN MASS for the FIRST TIME and are over taxing the system.

2.  Buy low, sell high...although specualtors can do those things out of order.

3.  Finance degree.  Big Firm.  Hedge Fund.

Although, technically, anyone with the right tools and a little money can be a speculator.  I speculate (the profession opposite of investing) on the margin (small bets) when I think the markets are doing odd things using the futures and options markets.