Speculators get a bad rap. Speculation in stocks, currecies and commodities futures is a necessary part of our economy. Many people have the idea that there is no added value in people “gambling” on commodities prices, for example. The truth is, most people just don’t understand of the role of speculators and speculation.
The Truth About ‘Speculation’
Speculative trading is crucial to a modern economy. Let’s use corn for an example. A farmer can plant his corn, and then see the price drop so low by harvest time that he loses his investment, and possibly goes bankrupt. How can he prevent this?
By selling some of his future production now, at a set price, he can plan ahead safely. The contracts he creates and sells will go up and down with the price of corn, but the risk is all in the hands of the speculators who buy them. They profit by re-selling them if the price goes up, and they lose money if it goes down. Our farmer, though, has his price, and can plan his business now.
Now, on the other side, a cereal company needs predictability in the prices of their basic commodities, in order to plan future...
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