Hedgers Vs Speculators
July 23rd 2008 03:08
I'll admit it. My post yesterday about hedging was in response to a post by Stock Market Punk.entitled THEY SUDDENLY GREW A CONSCIENCE? in which the author, seeing that the oil price fell, said,
I commented on his blog,
Stock Market Punk replied, in part,
I replied,
I then wrote What's Bad About Speculators which examines hedging and the role of speculators. I said hedging was a legitimate activity to protect one's business, much like fire insurance protects our homes.
Looking back on the post, I meant to say that the world is made up of hedgers and speculators. Speculators take the other side of the trade, either buying or selling hoping to make a little or a lot. What wasn't clear is this: We need speculators. Without speculators the corn farmer would have no one to sell to, the manufacturer who uses the raw material would have no one to buy from.
The Stock Market Punk wrote in follow up,
Hedgers are not the speculators and it is a legitimate business activity. Speculators are on the opposite side risking their capital, trying to make a buck by supplying the liquidity.
" I don’t know people, but somehow, I don’t think they even realize they are doing anything wrong. The reason they are selling now according to an Associated Press report is because of fear of the effects of a rising inflation."
I commented on his blog,
These traders are not selling for that reason. Did you notice Oil peaked when politicians started talking about opening up drilling in the offshore areas? The only thing that will bring down prices, Econ 101, is increased supply.
To me, the Law on Supply and Demand, only applies when the "buyers" are the "consumers."
I replied,
Now, that's just silly thinking. A buyer is not limited to just consumers. Buyers are can have every reason in the world to buy including irrational, insane reasons to buy. That goes for sellers, too
I then wrote What's Bad About Speculators which examines hedging and the role of speculators. I said hedging was a legitimate activity to protect one's business, much like fire insurance protects our homes.
Looking back on the post, I meant to say that the world is made up of hedgers and speculators. Speculators take the other side of the trade, either buying or selling hoping to make a little or a lot. What wasn't clear is this: We need speculators. Without speculators the corn farmer would have no one to sell to, the manufacturer who uses the raw material would have no one to buy from.
The Stock Market Punk wrote in follow up,
What is wrong with speculation? In general, nothing. It is a legitimate business strategy. Anybody can speculate by hedging and make a lot of money in the process and, if the speculator stay above board, he/she has nothing to worry about the law.
Hedgers are not the speculators and it is a legitimate business activity. Speculators are on the opposite side risking their capital, trying to make a buck by supplying the liquidity.
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