Monday, November 21, 2005

In defence of the speculator


The Indian Express Thursday, August 25, 2005
Governments, regulators and the financially illiterate across the world, suspect, fear and abhor speculators.
  • I just can’t understand why thousands of people, pursuing a full-fledged, legally-sound profession, are being looked at as morally depraved bad-guys.
  • Here’s a regular man-next-door, with a family to support, who has chosen to buy and sell stocks for a living.
  • He has invested his capital to buy and sell these shares. He has invested his time and mind in studying price movements, maybe even fundamentals of companies.
  • He has made efforts to come to grips with the entrails of how trading works. And he’s there to make a profit out of it.
Just what does a speculator do? He trades — buys and sells in short time-gaps — stocks, currencies, commodities, derivatives and even real estate. He does this by taking a call on where prices will be in the short term. The term could be as short as a couple of days, it could be a couple of weeks, or even a couple of months. Much of his investment is leveraged, that is, he invests on margin. He takes extreme high risk with his investment — if his call is wrong, he generally loses all his money, if right, he gets a fat return.
Above all, he serves a very important function in society in general and in the stock markets in particular. But for him, there would be no liquidity in the market. Meaning, if an investor wanted to sell his shares at any given point, she would spend far more time seeking a buyer who would pay the price she’s asking for, or else, sell at a lower price and increase the spread between the ‘buy’ and ‘sell’ price of a share. The speculator, by absorbing a significant part of market risk (the potential to lose money), in lieu of significant rewards, smoothens transactions.
Yes, the speculator doesn’t make software, add value. But the value he provides allows thousands of Infosys employees and shareholders to encash their wealth, when they want it, at the least cost. Unlike fifteen years ago, the potential for manipulation in the top 100 or even 200 shares is difficult. That’s why the buy-sell difference in these shares is small. Compare that difference with smaller or less traded stocks, and you’ll know the role of the speculator and the value he brings.

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