Editing Speculation (section)

==Economic benefits==

===Sustainable consumption level===
[[Image:Philippine-stock-market-board.jpg|thumb|right|Speculation usually involves more risks than investment.]]
[[Nicholas Kaldor]]<ref>Nicholas Kaldor, 1960. Essays on Economic Stability and Growth. Illinois: The Free Press of Glencoe.</ref> has long argued for the price-stabilizing role of speculators, who tend to even out "price-fluctuations due to changes in the conditions of demand or supply", by possessing "better than average foresight". This view was later echoed by the speculator [[Victor Niederhoffer]], in "The Speculator as Hero",<ref>Victor Niederhoffer, The Wall Street Journal, 10 February 1989 [http://www.dailyspeculations.com/vic/spec_as_hero.html Daily Speculations]</ref> who describes the benefits of speculation:
<blockquote>Let's consider some of the principles that explain the causes of shortages and surpluses and the role of speculators. When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell. This reduces prices, encouraging consumption and exports and helping to reduce the surplus.
</blockquote>

Another service provided by speculators to a market is that by risking their own [[capital (economics)|capital]] in the hope of profit, they add [[Market liquidity|liquidity]] to the market and make it easier or even possible for others to offset [[risk]], including those who may be classified as [[hedge (finance)|hedgers]] and arbitrageurs.

===Market liquidity and efficiency===
If any market, such as [[pork belly|pork bellies]], had no speculators, only producers (hog farmers) and consumers (butchers, etc.) would participate. With fewer players in the market, there would be a larger [[bid/offer spread|spread]] between the current bid and the asking price of pork bellies. Any new entrant in the market who wanted to trade pork bellies would be forced to accept this [[market liquidity|illiquid market]] and might trade at market prices with large [[bid–ask spread]]s or even face difficulty finding a co-party to buy or sell to.

By contrast, a [[commodity]] speculator may profit from the difference in the spread and, in competition with other speculators, reduce the spread.  Some schools of thought argue that speculators increase the liquidity in a market, and therefore promote an [[efficient-market hypothesis|efficient market]].<ref name="chicagofed.org">{{Cite book |last=Heckinger |first=Richard |title=Understanding Derivatives: Markets and Infrastructure |date=August 2013 |publisher=Federal Reserve Bank of Chicago |edition=Revised |chapter=Derivatives Overview |chapter-url=http://www.chicagofed.org/-/media/publications/understanding-derivatives/understanding-derivatives-chapter-1-derivatives-overview-pdf.pdf |archive-url=https://web.archive.org/web/20221012041520/http://www.chicagofed.org/-/media/publications/understanding-derivatives/understanding-derivatives-chapter-1-derivatives-overview-pdf.pdf |archive-date=12 October 2022}}</ref> This efficiency is difficult to achieve without speculators. Speculators take information and speculate on how it affects prices, producers and consumers, who may want to hedge their risks, needing counterparties if they could find each other without markets it certainly would happen as it would be cheaper. A very beneficial by-product of speculation for the economy is [[price discovery]].

On the other hand, as more speculators participate in a market, underlying real demand and supply can diminish compared to trading volume, and prices may become distorted.<ref name="chicagofed.org" />

===Bearing risks===
Speculators perform a risk-bearing role that can be beneficial to society.  For example, a farmer might consider planting corn on unused [[farmland]]. However, he might not want to do so because he is concerned that the price might fall too far by harvest time. By selling his crop in advance at a fixed price to a speculator, he can now hedge the price risk and plant the corn. Thus, speculators can increase production through their willingness to take on risk (not at the loss of profit).

===Finding environmental and other risks===

Speculative [[hedge fund]]s that do fundamental analysis "are far more likely than other investors to try to identify a firm's off-balance-sheet exposures" including "environmental or social liabilities present in a market or company but not explicitly accounted for in traditional numeric valuation or mainstream investor analysis". Hence, they make the prices better reflect the true quality of operation of the firms.<ref name=uh>[http://www.economist.com/businessfinance/displayStory.cfm?story_id=15536305 Unlikely heroes - Can hedge funds save the world? One pundit thinks so], The Economist, 16 February 2010</ref>

===Shorting===
[[Short (finance)|Shorting]] may act as a "canary in a coal mine" to stop unsustainable practices earlier and thus reduce damages and form market bubbles.<ref name=uh/>