Do speculators help or hurt a market? The answer
is: it depends.
We’ll consider a speculator as someone who buys a product
with no intention of using it, but instead hopes to make
a profit by selling it at a higher price in the future.
Consider a commodity that currently selles for a price p1.
Supply and demand have been stable, and are expected to remain
stable until time t2. At that time there is expected
to be a disruption in the supply that will suddenly raise the
price to p2. If there are no speculators, then
the market will be disrupted by this sudden jolt in the price.
Speculators who expect the supply disruption is coming
have an opportunity to make some money. Let p(t) be
the price as a function of time. The speculators will buy
a quantity q at time t1, which they will finance by borrowing a
quantity qp(t1). At time t2 they sell their
stockpile and gain a revenue of qp(t2), but they
also have to pay back the loan with interest.
However, as the speculators buy and sell this product,
they will affect the market price. These effects will
continue until the speculators profit becomes zero.
The early speculators who can buy before the price adjusts
can make a profit, but people who try to buy late will
find the price has already adjusted to make the profit zero.
The trend of the market price in the market with
speculators will be the solution of this equation:
profit = 0 = revenue from sale – amount paid back to lender
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–Douglas Downing
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douglasadowning 