This article is machine-translated by Google.

Speaking of speculation, a lot of people think of the evil capitalist world in the image of greedy businessmen, and most likely the economic bubble, the financial crisis linked to the feeling intuitively speculation is harmful to one's interest. Many people believe that speculation is involved in a gambling scam or minority riches and most people go bankrupt, all the speculators are trying unearned riches, but let others bear the loss, so called evils of capitalism embodied. Communist countries have banned any speculation, People's Republic of China who have criminal law "crime of speculation" it was not abolished until 1997.

Speculation and investment

If the speculative (Speculation) is considered to be harmful, then the investment (Investment) do?

Many people put out of ignorance or deliberately confuse the two, in fact, speculation and investment is fundamentally different behaviors, motivations, methods, the effect is entirely different. Investment is to some resources (money or some time) into a project, continuing to obtain benefits, such as infrastructure construction in the future a long time to learn a particular knowledge and skills, buy real estate, stocks. The speculation in the market is trading at a lower price to buy and sell at a higher price expectations, such as the sale of gold, bonds, futures, real estate, stocks and even antiques, works of art. Obviously gold, antiques, these items are not their own money to give birth, and only relied on their own price appreciation obtain benefits, if there is no transfer of ownership would be no income, compared to the construction of bridges, roads, even without learning skills acquired transfer of ownership, but also to continue to earn revenue. Can be seen literally from English, English is speculation speculate, speculate intention is "thinking", "speculation", so the speculation focuses on "expected", and the focus of investment is "invest."

The reason why investment and speculation can be confusing, because some of both investment and speculative trading behavior may, for example, real estate and stocks. Simply put, the goal of investing in real estate is to collect rent because the rent can be obtained continuously in a long time, the same way to invest in stocks is the right company to get the profit dividend. The real estate speculation or speculative stocks and other items no difference, just want to buy at lower prices and higher prices thrown by its own price appreciation to earn money.

Market efficiency

Invests in the personal and economic benefits to society as a whole is obvious, but speculation is not a selfish behavior?

Speculative purpose is to obtain excess returns, which is more than the overall market average earnings. Perfect market equilibrium is the state of the market, all sellers will be able to sell goods to the equilibrium price to sell, and all buyers will be able to balance the needs of the commodity price to buy, the price is determined by supply and demand perfection. In such a market is speculative gains expected average yield market, this market is called efficient market (Efficient Market). Efficient market is the best form of the market, buyers and sellers interests are maximized, the allocation of resources to achieve Pareto optimal.

Effective market has three basic assumptions:

1. The market response to the new information immediately and to adjust to the new price.
2. The message is completely random.
3. The large number of market participants, but always rational pursuit of maximum profit.

Assuming that three conditions are very strong, in the real world fully meet the conditions of effective market does not exist. However, some of the market to meet the efficient market hypothesis may exist, and therefore there has been a measure of varying degrees of efficient markets.

Weak Efficient Market

Market information is public, and fully reflect all transactions. The current price of the commodity has been fully reflected in the past a variety of market information. In the weak efficient market, we predict future price movements by commodity prices and transaction history information is impossible (that is, technical analysis is invalid).

Semi-strong efficient market

The price of goods has been fully reflected commodity-related public information, such as stock prices fully reflect the company's public financial statements, as well as the macroeconomic situation, the political situation. In the semi-strong efficient market through fundamental analysis attempts to predict price is impossible.

Strong and effective market

Commodity prices already reflect all information, including non-public information, such as company secrets, leadership decisions. Under strong efficient market, even if there is insider information can not be obtained over benefits.

Speculation benefits to society

Speculation has been able to carry out, because the market did not reach a valid state, rational speculation can help markets become more efficient. Speculation about is to buy low and sell high, this will make the price tends to equilibrium. For example, a typical speculative arbitrage between different markets (Arbitrage), some of the items due to the lack of liquidity, will produce the difference between different markets at lower prices in the market to buy and sell a higher market price the process can earn a lot of profit. At the same time, prices will tend to balance between the market adjusted commodity surpluses and shortages, optimize the allocation of resources.

In the beginning of reform and opening up in China, through long-distance traffic in arbitrage between markets and speculation is a prohibited behavior. Because, according to Marxist political economy, equivalent to the value of labor productivity (rather than utility exchange), no long-distance trafficking and production, and therefore useless to society, the money earned from the exploitation come. But this view was questioned soon, international trade is also a long-distance traffic, is also illegal thing? If so how can it open.

Speculation is that the main contribution of social transfers surplus and deficiency of time and space, more resources to help optimize the configuration. But speculation may fail, for example, at a lower price to buy the commodity market to another market later but found prices become lower, then there is no bring optimal allocation of resources, while also responding to punish speculators. Another effect of speculation is to reveal the future price of a commodity, such as stock price is in fact the people of this company's future earnings expectations, in fact, many of the messages are reflected in the price, so the stock market as the economy's "barometer" .

Insider trading benefits to society

Insider trading refers to the use of inside information in speculative trading. For example, in a policy issued on the eve of the government officials to take this news in advance to buy or sell in the market, because he almost completely determine the message disclosed after commodity price movements, if up, then advance to buy, if dropped, then advance to sell, so you can not lose. Have access to insider information of people have company executives, securities practitioners, media reporters, PS and so on.

Insider trading is a very unfair behavior, so hated by most people, almost all countries have laws prohibiting insider trading, specific measures to prohibit securities practitioners securities trading in their personal capacity, for possible insider trading traders additional regulatory investigation and so on. Despite the fact there are severe legal sanctions, insider trading or another, and the enormous social costs of regulation brought about, people have to reconsider whether it is necessary to prohibit insider trading.

Academic study of insider trading, there are two main theories, namely agency theory (Agency Theory) and market theory (Market Theory). Because of the company's ownership and operation of the stock market has undergone separation, thus creating a potential conflict of interest between shareholders and company managers. Supporters agency theory of insider trading insider trading can be considered as one of the rewards of company managers, thus encouraging them to engage in innovation, enhance corporate value. Opportunity to executives of insider trading is equivalent to him added incentive, the incentive pay than more efficient. While opponents argue that non-decision-makers can not avoid the opportunity to take advantage of insider information, such as secretaries, typists and so on. Supporters argue that insider trading insider trading market theory can accelerate the flow of information, so that prices can quickly converge to a new equilibrium. For example, a stock price is currently $ 100, if a disclosure of inside information will rise to 110 yuan, 110 yuan is indicating that the current market price of the stock correctly, if allowed to make the price more quickly insider fairs tend to correct pricing, It can reflect undisclosed message, but also reduce the market price fluctuations. Opponents argue that the only benefit of insiders, external damage to confidence rather than involved in the transaction.

The real world, a lot of stock price movement before and after the disclosure of inside information is almost the same, which reflects the existence of insider trading - because before the announcement price already reflects this news to be published. Disclosure allows insider trading after the validity period of strong non-market will be shortened, and therefore will greatly enhance the effectiveness, achieve strong and effective market.

Irrational speculation

Speculation is not always beneficial to the society, because of the existence of irrational speculation. What irrational speculation it? The most common is herding, follow the trend of the sale, you buy me buy everyone together to buy, buy is not clear as to why, but the "feel" prices will go up in the future. Since the subject of the transaction (directly or indirectly) is a person, who is always easy to be emotional control, people tend to overconfidence, loss aversion, so they are prone to irrational decisions. Behavioral finance specialized people irrational speculation.

Irrational bubble theory that the foam always caused by irrational speculation, many people do not do any analysis before the sale (or invalid analysis, such as the lottery trend analysis), but on their own faith support, in many cases the market will noise as valid information to buy and sell, these people are called noise traders. Noise trader herding easy to form, positive feedback trading strategy by making the market constantly strayed from the equilibrium state, until the collapse of the bubble. Irrational speculators also easily manipulated and utilized by malicious disinformation institutions, manufacturing and other means to make these people herding entrapped, and make a profit in the bubble burst.

All in all, speculation is not a zero-sum game, it helps the functioning of the market, optimize the allocation of resources, and create a lot of wealth. Speculation Rational Analysis of the individual and the market as a whole is beneficial (at least harmless) of. Speculative no moral injury, but not a crime.