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Speculation in local stock market perspective

Md. ToufiqueHossain | Monday, 9 December 2019


Investment and speculation are very common in the financial market around the globe. Investment is the process of buying and selling stocks and other products whereas speculation is a process where high risk is involved in expecting immense profit. In the case of the financial market, to tell which one of the two is good or bad is not that easy.
In the global perspective, speculation is a beauty for two reasons."First, without speculation, untested new companies like Amazon.com, and in earlier times, the Edison Electric Light Co., could never be able to raise the necessary capital for expansion. Second, the risk is exchanged but never eliminated every time a stock is bought or sold. The buyer purchases the primary risk that this stock may go down. But the seller still retains a residual risk that the stock the investor just sold may go up". [The Intelligent Investor by Benjamin Graham].
Investment is an emotional substance in all financial markets, it's all about rational behaviour of the market. On the other hand, it's also true that all investors are not rational.
Let's take a look at Bangladesh's share market. There is a debate over how much impact the stock market will have on Bangladesh's economy. Many people say the stock market in Bangladesh is speculation-driven by nature. In fact, the ups and downs of share prices in the country's capital market are so frequent that the speculation theory does not work. Investors cannot act rationally, rather they go for wild speculaton in a volatile market. It is the irrational behabiour or bad speculation. The Illustration 1 shows the capital market's stock price fluctuations and volatility in the last one year as suggest the available data of the Dhaka Stock Echange (DSE).
Worldwide the capital market is a risky place. Its price movement will be complex and it is quite natural. Enactment of new laws, neceassry rules and their proper enforcement and use of the latest technology will help keep the market's pace normal. But more important is the market players' intelligence. It is also true that the stock market of Bangladesh is highly regulated and more structured than any time in the past.
The main problem of this market is the market players want to make profit within a very short time. They are not free from high ambition, fear and greed. But they should play intelligently. There is no alternative to intelligence and a long-term investment strategy in a highly volatile market like that in Bangladesh. Graham rightly said: "An investment operation is one which, upon thorough analysis, promises the safety of principal and an adequate return and remember there is intelligent speculation as there is intelligent investing".
Speculation is a very common term in the capital market. Every stakeholder needs to know proper application of it. And in this case, the stakeholers' attitudes are an important issue.
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Md. Toufique Hossain is a financial market and economics columnist and researcher. toufique2010@gmail.com