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Speculation, often known as speculative trading, is the act of engaging in a financial transaction that carries a considerable risk of losing value but also carries the hope of a sizable gain or other significant value. With speculation, the chance of a sizable gain or other form of compensation more than offsets the risk of loss.

A speculative investment buyer is probably preoccupied with price changes. Despite the high level of risk involved in the investment, the investor is often more focused on making money based on fluctuations in the investment’s market value than on long-term investing. Currency speculation is the practice of investing speculatively when buying foreign currency is involved.

In this case, an investor purchases a currency with the intention of selling it at a higher price in the future as opposed to an investor who purchases a currency to fund an import or a foreign investment. There wouldn’t be much incentive to speculate without the promise of huge gains. Sometimes it can be challenging to distinguish between speculation and straightforward investment, forcing the market participant to think about whether speculation or investment depends on factors that gauge the asset’s nature, the anticipated length of the holding period, and/or the amount of leverage used on the exposure.

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