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Speculative Risk: Definition & Examples

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  • 0:01 Introduction to…
  • 0:46 Definition of Speculative Risk
  • 1:28 Examples of Speculative Risk
  • 2:50 Lesson Summary
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Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

This lesson will provide an overview of speculative risk. This overview will provide the definition and several examples of speculative risk from an investor's point of view.

Introduction to Speculative Risk

Mary recently started her first job after graduating from state college. Fortunately for her, she was able to work several part-time jobs during college and graduated with no student loans. Now that she has received her first paycheck, she's interested in saving some of her earnings through investing. She turns on CBN, the local finance channel, where the television announcer mentions something about speculative risk as it relates to investing.

Mary can't sleep that night. She's heard good things about investing, but those two words, speculative risk, scare her. So, she searches online for the phrase and comes across this article. She sees that speculative risk is a risk, which, if accepted, results in an uncertain degree of loss or gain.

Definition of Speculative Risk

We just learned that if an investor, such as Mary, accepts speculative risk, then the outcome of her investment is uncertain. This frightens Mary. She thought that investing had been just that, investing, and that you choose which companies that you would like to own, and subsequently, purchase shares of stock. What Mary didn't know, however, is that there is a range of speculative risk. Think of a spectrum which has two ends. One end has less speculative risk, while the other has more. Different types of investment vehicles, such as different types bonds and stocks, then fill the spectrum. This is where Mary was getting confused. She thought all speculative risk was the same, when in reality there are different levels.

Examples of Speculative Risk

Almost all investment activities involve some risk. However, some risks are more risky than others. For example, historically, bonds have less speculative risk than stocks. This is due to the very definition of a bond. Think of a bond as a debt. Someone loans a company money, and the company promises to repay that loan with interest. Stocks, however, have no promise behind them, and thus, the investor asks for more reward since there is more risk.

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