Speculative Motive

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21 Aug, 2024

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A speculative motive is a strategy employed by investors and traders to keep cash on hand in order to take advantage of future investment opportunities. It works with the idea that the future is uncertain. It justifies the need for a certain amount of liquidity in a portfolio.

Withholding cash by stepping aside from making investments for future endeavors is a wise decision. It provides liquidity to access new projects in the future and caters to new aspirations. The motive sets a clear path to financial freedom by encouraging saving. Moreover, it helps search for better opportunities with attractive interest rates.

Speculative Motive Meaning

The speculative motive indicates people's desire to hold funds to be prepared to take advantage of any alluring investment opportunity necessitating cash expenditure in the future.
Setting a portion of money aside for speculative purposes helps one not miss out on new opportunities.
The motive sets a clear path to financial freedom by encouraging saving. Moreover, it helps search for better opportunities that give a phenomenal interest rate or return.

Speculative Motive In Economics Explained

Speculative motive is one of the primary drivers of investors' trading behavior. Under its influence and considering current market prices, investors would base their trades on predictions of future stock market prices rather than the intrinsic worth of the stocks. It indicates the significant influence of speculation. Furthermore, it also signals excessive optimism during the boom phase of a business cycle.

Along with the transaction and precautionary motives, the speculative motive is one of the three that govern the need for money. The motive explains the preference for or a desire to have money or highly liquid financial assets, such as local or foreign currency, for purposes other than those necessary for daily life or household consumption, specifically for successful investments.

The importance of speculative motive can be analyzed from people's decision to choose bonds or bank deposits. Securities like bonds become less appealing to retain, and money becomes more appealing if interest rates are thought to increase, causing a decline in bond values. Therefore, it encourages individuals to sell bonds and keep their money in savings accounts or to postpone buying bonds and keep the money they would have otherwise invested in bonds to collect interest.

Similarly, bonds become more desirable than money if interest rates are predicted to decline. Consequently, there is a motivation to buy bonds rather than store as much cash. The concept is a part of the Keynesian Theory of Demand for Money.

Keeping all of one's money invested for a certain period is not always wise. One of the golden rules of investing is that investors should invest only what they are okay with losing. One way of ensuring it is by having a clear set of investment plans. It can be achieved by dividing individuals' aims and aspirations into long- and short-term goals and noting the period required to achieve them

The most important part of planning is strategizing—creating a balanced portfolio. A balanced portfolio mixes high, medium, and low-risk securities. So, losses made on high-risk securities are balanced by profits from low-risk securities and vice versa.

The market is always changing. New projects come up from time to time. For certain securities, there is also a probability that interest rates will rise in the future, providing better returns on investment. Investors can take advantage of such lucrative investment opportunities when they have set aside the money. Setting a portion of money aside for speculative purposes helps one not miss out on new opportunities. Moreover, the set-aside cash can come in handy when an investor exhausts all emergency funds under specific circumstances.

Benefits Of Speculative Motive

There are quite a few possible advantages proved by the speculative method, and they are:

Profit: Setting aside a certain amount of money has a higher chance of being invested in stock market assets that guarantee good returns as the investor gets additional time to be cautious about making necessary movements.
Opportunity: Often, investors blindly purchase a fundamentally good asset and exhaust all their money. It leaves them no room, even if they wish to buy another stock. Setting aside some money helps them to buy additionally. When they have extra cash and new exciting projects: investors continue to research various types of companies and stock options. This way, the money can be put to good use.
Emotional decision: Investments sometimes are made with impulsive decisions. Often, investors fall prey to once in a lifetime mentality and buy the available stocks with cash in hand. Of course, this is an emotional decision. However, setting aside some money can be a logical step toward maintaining better finances.

Examples

Let's look into some examples of speculative motives:

Example #1

XYZ is a company that has a certain amount set aside for trading. However, since savings are happening in anticipation of higher interests, a portion of the money available is moved with a speculative motive.

Example #2

Dave is an investor who invests 50% of his salary in stocks and 30% in debt instruments and keeps 20% of his salary aside if any further investment choices are to be made.

Frequently Asked Questions (FAQs)

What is speculative demand for money?

It indicates the preference or desire to possess money or highly liquid financial assets, such as local or foreign currency, for uses other than those required for survival, or consumer spending, namely for lucrative investments. One of the three wants that control demand for money, together with precautionary demand and transaction demand, is speculative demand.

What is the difference between speculative motive and precautionary motive?

Precautionary motive is where individuals and companies set aside money from their income to pay for these unforeseen expenses. The need to hold cash under speculative motive indicates people's desire to be prepared to take advantage of any lucrative investment opportunity that requires a monetary outlay.

What are transaction motive and speculative motive?

Transaction motive indicates the requirement and needs to hold cash to meet day-to-day needs. At the same time, the drive to keep the money to make investments and accumulate wealth over time points to the speculative motive.