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Speculation refers to people buying and selling financial assets with the expectation of making profits if there is a favorable change in price.
Investment and speculation cannot be differentiated precisely. One of the factors that differentiates the two is the excessive amount of leverage that is used in speculative positions as compared to actual investments. When people trade in assets using funds that have been borrowed the loss they can incur can be very large. Both the profits and losses in leveraged positions is very large but the number of people that profit from entering into speculative positions is very small as compared to those that make a loss. This is financially very bad for people that decide to become speculators.
Speculation is also bad for the economy. A recent example is the very large depreciation of the Indian rupee due to a rapid build up of speculative positions that drove the currency to extremely low levels. This increased the cost of imports and caused a lot of loss to businesses that had to import goods as well as companies that bought products like petroleum essential for the economy. After the central bank of India took steps to reduce speculation in the currency and only allowed the trading of futures in the currency to hedge positions by importers and exporters did the currency return to reasonable levels.
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