Speculation on a Stock Exchange

Not everyone who trades on a stock exchange does so as a long-term investor seeking dividend income and steady capital appreciation. A speculator trades purely to profit from short-term price movements, buying or selling securities based on an expectation of how their price will move in the near future, often without any intention of holding the security for its underlying value at all. Speculation is a recognised, legal part of stock-exchange activity — indeed, speculators add to the market's liquidity — but it carries materially higher risk than genuine investment, since it depends on correctly predicting short-term price swings rather than a company's real long-term performance.

Traditional stock-exchange terminology identifies three well-known types of speculators, named for their expected behaviour:

• Bull — a speculator who expects the price of a security to rise in the near future, and therefore buys now with the intention of selling later at a higher price to book a profit. A market in which prices are generally rising is itself often described as a "bull market" or "bullish" market, after this behaviour.
• Bear — a speculator who expects the price of a security to fall, and therefore sells now (sometimes selling securities they do not yet own, intending to buy them back later before delivery is due) in order to buy back later at a lower price and pocket the difference. A generally falling market is correspondingly described as a "bear market" or "bearish" market.
• Stag — a speculator who applies for shares in a company's new public issue, not out of any genuine intention to hold the shares as a long-term investment, but purely in the hope of selling them soon after listing at a premium over the issue price, if the issue is well received by the market. A stag is thus a speculator on the primary market's own new-issue activity, rather than on the secondary-market trading of already-listed securities. …