Speculative Investors their Role in the Market

It is interesting to observe the price swings that various markets go through. At one time there is little demand for a particular investment item then all over a sudden that investment item attracts such massive funds that becomes really amazing. How does this happen? Well that’s the job of speculative investors who are constantly scouting for new business opportunities to make massive gains.

Speculative investors by their very nature are high risk investors. They would be called the innovators or the early adopters if we were talking about technology or marketing respectively. They normally lead the pact before the masses join in to engage in the given form of investment. They thrive on the basic principle of the higher the risk the higher the returns’ and are not shy of committing huge capital towards a new venture. Contrary to popular believe, these investors are very informed and undertake rigorous information checks before making their investments.

What we commonly refer to speculators in emerging markets like Kenya as speculative investors are actually crowds of ill informed copy cat’ investors. That type of investor is not part of my focus in this article. They are the ones responsible for erratic price swings and the creation of investment bubbles that just make it impossible for the long term investor to do any forecasting based on hard facts and the fundamentals. My focus is the speculative high risk investor.

It is important to note that all forms of investment are speculative in one way or another. This is because the investor puts in his money in the hope that in future, all factors held constant, his investment will yield good returns thus increase his income.This means that for every form of investment there is a level of risk based on the uncertainty of the future. There are those investors who take precautions to reduce the element of risk in their investment and try to make as many things certain and predictable as possible whom we refer to as low risk investors- the bulk who are long term investors. The other type of investor, the speculative investor, is also aware of risks and uncertainty involved in the investment but also enjoys the thrill in investing in such markets. In my opinion these investors therefore play a very important role in the investment cycle.

Firstly, speculative investors are important because they are the main drivers of price changes in the market through the exchange of their investments. There are therefore the ones who help governments and other parties evaluate the performance of a given market through indices created to monitor that market. They also serve as an alternative to the government in spending huge amounts of money in emerging technologies and companies. I just wonder what would have happened if it wasn’t for the speculative investors involvement in the techno boom in the Silicon Valley. Today we would not have Yahoo and Google and all these other I.T companies. Also the U.S government would have born the brunt of the huge losses incurred through investments in companies that collapsed after the techno bubble burst. I think in Kenya the government can use speculative investors to fund high risk projects like oil exploration to avoid committing its own funds. Speculative investors can actually attract huge foreign capital as we are likely to witness after the Safaricom I.P.O which can be directed into other high risk investments. This is the time for Kenyan companies in Information Technology Information to raise capital for their expansion and other industries for which little is understood. The speculative investors will then identify the opportunity making huge profits and losses in the process then open the doors for the rest of us to make our smaller margins having learnt from the experiences of these speculative investors.

Unfortunately, the next group that will be attracted to the market will be a bulk of copy cat’ investors who having no knowledge of the market, will spend huge sums of money into the emerging market and be used as fodder’ by the speculative investors. I recommend some from of security and protection to be offered to this group based on a draft concept of developing an investment cycle. This group should be advised to pull their funds together into collective investment schemes that will then manage and diversify the risk on their behalf creating some form of protection to their investments. In doing so, the creation of an investment bubbles will be prevented and thus maintain the reputation of the given industry and the attraction of funds for product development from true speculative investors.