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Your approach to the market will be different for speculation than for hedging or investing.

For an investment, a physical product like a commodity (corn, gold, oil etc.), a share (equity, stock) or property are bought with the expectation that as prices rise profit will be made. There is normally no gearing (leverage) of the product. You will expect to make perhaps 10% to 20% per year. Risk potential is quite low. Warren Buffett’s (seen by many investors as the most successful investor of the 20th century) return on investment for the past 40 years is on average about 18% per year. Usually a "Buy and Hold" approach.

For investment you need a lot of capital. Investments in shares and especially property are long-term investments (years). Income is usually as dividends, capital appreciation and interest or rental income.

Hedging is usually done to reduce price risk on physical commodities like grains and oil, but is also used to hedge against currency fluctuations. Usually a futures or options contract will be used. A corn producer will for example, when planting in June, decided that the forward contract price for maize delivery in December when he harvest is high enough to make a profit. He is afraid that prices may drop in harvesting time. He can sell a December future or option contract to protect his price. When prices fall his futures or option will make money.

Hedging costs can be high, but hedging and protecting your prices will keep you in business. A hedger will always have 2 opposite positions, a buy and a sell. A grain farmer will be long (buy) the physical grain and short (sell) a future or option contract. In a perfect hedge you can not lose money, if the price go up you lose on one leg but make money on the other hedging leg. Using options will work a bit different, you can this way do minimum prices. In a later Module I will do a more in depth discuss of hedging strategies.

Speculation is usually done to make profit on short term market movements. Usually a few hours, days and sometimes weeks.

Speculation usually has a leverage (gearing) component . This means that with a small amount of capital you can take up a fairly large position. You can for example with CFD’s on stocks, with the same amount of funds you need to buy one stock, have exposure to the market movement of 10 stocks. You money is then geared 1 to 10. Gearing is a double edged sword. Gearing can go in you favor or against you.

Futures and options on commodities are normally also geared instruments.

Gearing increase risk, you need a well planed risk management plan when executing a trade.

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