What Are Speculators in the Stock Market?
Speculators have played a vital part in the exchange of shares since the first stock market. From Jay Gould to Bernard Baruch, Jesse Livermore and George Soros, speculators past and present have served a vital role in ensuring good liquidity and efficient pricing in capital markets, all the while pursuing quick profits for themselves and their investors.
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History
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Speculation has been a major part of the stock market since the first modern exchanges were founded in the latter part of the 17th century. While investors deployed their capital in hopes of slow, steady growth, speculators entered the picture looking for large, sharp gains, irrespective of whether or not the companies they bought were fundamentally sound. Although style and form have changed over the years, the fundamental nature of the speculator hasn't changed.
Function
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Speculators buy, sell, and short-sell stocks solely for their own gain. In pursuing this self-interest, they perform an important role in the marketplace. That role is to provide liquidity. A speculator is willing to buy a stock at price levels far higher or lower than most standard investors, therefore insuring that these investors will have somebody to sell to if or when they want to unload their shares.
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Types
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There are numerous different types of stock market speculators, each with their own view of how to capitalize off price fluctuations in the stock market. The most common type of speculator is the momentum player, who likes to throw his money after stocks that have already gone up very far. His motto isn't buy low, sell high, but rather, buy high, sell higher. The other principal type of speculator is a contrarian, who is almost the polar opposite of a momentum chaser. He will seek to short-sell stocks he considers overbought and overvalued, while purchasing shares of companies that are down and out of favor.
Time Frame
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Speculators operate on many different timeframes, the most common being short and intermediate term, from several days to several months. Speculators rarely hold onto their stocks for multiple years like long-term investors do unless they happen to be riding a particularly profitable trend.
Misconceptions
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One of the primary misconceptions about speculators is that they are reckless, swashbuckling pirates of finance. While some have certainly lived up to this stereotype, most serious speculators are very disciplined and professional about their operations and go to great lengths to control their risk before entering a trade.
Fun Fact
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Jesse Lauriston Livermore, arguably the most famous speculator of the last hundred years, made $100 million (equivalent to over $2 billion in today's dollars) by buying short equities before the October 1929 Crash. Over the next eleven years, Livermore would lose every penny and eventually end his life by his own hand in 1940.
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