What is 'speculative trading'?

Speculative trading refers to the practice of buying or selling financial instruments, such as commodities, stocks, or currencies, primarily based on predictions of future price movements rather than on the fundamentals of the underlying asset. This approach is characterized by taking on higher risk in the hope of achieving significant short-term profits. Traders engaging in speculation often analyze market trends, sentiment, and potential catalysts that could influence price changes.

By predicting price movements, speculative traders aim to capitalize on short-term fluctuations in the market. This is different from investing based on long-term fundamentals, such as company revenues or growth prospects, which is characteristic of more conservative investment strategies. Consequently, speculative trading is often associated with increased volatility and can lead to substantial losses as well as massive gains depending on the accuracy of the predictions.