Traditionally, while badla was practised, it was believed that
speculators were those who carried forward their positions
through badla. Did speculation end when badla was banned? No. In
the post-badla era, speculators are understood to be those who
buy (or sell) shares at low (or high) prices so that they can
sell (or buy) them back when prices are high (or low) - within
the same settlement period or even within the same trading day.
Now, what do "genuine" investors do that is so
different and remarkably more virtuous? They buy (or sell) shares
at low (or high) prices so that they can sell (or buy) them back
when prices are high (or low) - perhaps spanning two or more
settlement periods. Is this speculation? It may be argued that
since a settlement does take place, wherein delivery of shares
against payment occurs, this is not speculation. However,
consider this: there are buyers who take delivery of certificates
at the clearing house, but do not send them to the issuers for
transfer into their name, since this may take an unpredictably
long time during which the freedom to sell and thereafter
deliver, is lost. Are such buyers speculators? When the
depository is in place (hopefully not 23 of them), delivery on
settlement date will become tantamount to transfer of ownership.
This, coupled with a weekly settlement cycle, will lead to a
scenario in the not-too-distant future, when shares will get
transferred within about two weeks from transaction date. How
will the speculator (or, conversely, the "genuine"
investor) then be identified? Already at the OTC exchange,
trading, settlement and transfer all get done in a single
transaction in realtime. Ideally, this is how it should work
across the rest of the market as well (i.e., when you buy a share
in a company, you become a part owner of the company, ipso
facto). Does this mean that the speculator will vanish?
Is there anyone who buys at a low price and sells at a high price
(or in reverse sequence) with an intention other than that of
making money? Even the investor who buys shares with a view to
earning only the dividend paid out by the issuer is, in reality,
speculating on whether or not the issuer in question will make a
profit and declare a dividend. What about the issuer himself? The
issuer who came to the market for capital was also speculating -
hoping to raise capital by convincing potential investors that he
is on to a lucrative project, and then hoping that his project
would be successful and that he would generate a profit which he
could then share with his investing public. From issuer to
investor, everyone in the value chain (other than pure service
providers, who work in return for a fee), is in fact a speculator
- someone who doesn’t mind taking a good risk if it will
fetch good returns. In the real world, success is not guaranteed.
Without a large, heterogenous mass of speculative opinion there
can be no liquidity, and hence no market. Die-hards will argue
that "excessive" speculation is where the problem lies
(like smoking too many cigarettes). What does this mean? Buying
and selling every week? Every day? Several times on the same day?
Someone please calibrate that scale.
In that same not-too-distant future, we may even have derivatives
exchanges (again, hopefully not 23 of them). The situation will
then ease up a bit for those looking for definitions, since the
speculator will then be identified as the one who plays the
derivatives market, notwithstanding the fact that the key driving
forces behind a derivatives market stem from the need to provide
a hedging mechanism for those who own a portfolio of investments
to better manage their risks, and not from the need to provide a
playground for speculators. Actually, the key lies in
understanding the concept underlying risk management itself.
People mistake risk management for risk minimisation. Well, what
happens to the golden rule of the risk/return balance? People who
are keen on making a pile of money may be willing to
intentionally take on risks, expecting better returns than others
who intend to play a safer game and are satisfied with lower
returns. ‘Risk management’ must not be seen in the
light of not taking any risks, but in the sense of knowing the
risks inherent in a decision, and consciously taking on those
risks. Risk management techniques deal with identifying areas of
risks and planning measures to counter potential failure or loss,
while risk management mechanisms enable managers to keep their
risks within the desired level of improbability. As long as the
market system is protected from collapse, individual players must
be allowed the freedom to bet their kingdoms over a game of dice.