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What Is Speculation?








To speculate is to theorize about something that is uncertain. We can
speculate about anything that is uncertain, but we use the word
"speculation" in this book with particular reference to the buying and
selling of stocks and bonds for the purpose of making a profit. When
people buy stocks and bonds for the income they get from them and the
amount of that income is fixed, they are said to invest and not to
speculate. In nearly all investments there is also an element of
speculation, because the market price of investments is subject to
change. "Investment" also conveys the idea of holding for some time
whatever you have purchased, while speculation conveys the idea of
selling for a quick profit rather than holding for income.

To the minds of most people, the word "speculation" conveys the thought
of risk, and many people think it means great risk. The dictionary gives
for one of the meanings of speculation, "a risky investment for large
profit," but speculation need not necessarily be risky at all. The
author of this book once used the expression, "stock speculating with
safety," and he was severely criticized by a certain financial magazine.
Evidently the editor of that magazine thought that "speculating" and
"safety" were contradictory terms, but the expression is perfectly
correct. Stock speculating with safety is possible.

Of course, we all know that the word "safety" is seldom used in an
absolute sense. We frequently read such expressions as: "The elevators
in modern office buildings are run with safety." "It is possible to
cross the ocean with safety." "You can travel from New York to San
Francisco in a railroad train with safety." And yet accidents do occur
and people do lose their lives in elevators, steamships, and railroad
trains. Because serious accidents are comparatively rare, we use the
word "safety."

In like manner it is possible to purchase stocks sometimes when it is
almost certain that the purchaser will make a profit, and that is "stock
speculating with safety." When Liberty Bonds were selling in the 80's,
many people bought them for speculation. They were not taking any risk,
except the slight risk that the market price might go still lower before
it would go higher, and that did not involve any risk for those who knew
they could hold them. The fact that the market prices of Liberty Bonds
would advance was based upon an economic law that never fails. That law
is that when interest rates go up, the market prices of bonds go down,
and when interest rates go down, the market prices of bonds go up. When
Liberty Bonds were selling in the 80's, interest rates were so very
high, it was certain that they would come down. That the market prices
of Liberty Bonds would go up was also certain, but nobody could tell how
much they would go up in a given time. It was that element of
uncertainty that made them speculative, and not that there was any doubt
about the fact that the market prices of them would go up. Buying
Liberty Bonds at that time was speculating with safety. If you read this
book with understanding, you will know much about speculating with
safety.





Next: Stock Some Terms Explained




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