Speculation is an investment strategy aimed at achieving profits in the short term by exploiting price fluctuations in financial assets or commodities. Although it is considered one of the short-term investment methods, it requires experience and skill in trading operations to achieve maximum returns and gains.
Therefore, in this topic presented by our site today, you will learn about the concept of speculation in trade and the conditions required to practice it, but not only that, we will also discuss the benefits that can result from this strategy. You will find details and explanations on these points and more in the article below.
Speculative trading
In the beginning.. speculation can be defined as a long-term investment strategy that depends on cooperation between the owner of the money and the owner of the experience, where the owner of the money provides the capital, while the owner of the expertise provides his knowledge and experience with the aim of achieving sound profits.
Mudarabah is usually carried out in Islamic banks, where a prior agreement is reached between the owner of the money and the owner of the expertise regarding the distribution of profits at a specific rate.
This approach allows the experienced person to manage the capital effectively based on his experience, and then the investor's money is invested in a way that achieves profit for both parties.
Conditions for successful speculation in trade
- The two contracting parties: there will be the owner of the business (the owner of experience and knowledge in a specific field) and the owner of the money (the person or institution that provides capital for investment).
- Basic capital: The amount of basic capital that is provided is determined by the owner of the money, which will be invested in mudaraba operations.
- Agreement on profit: An agreement is reached between the two parties on the percentage or method of determining the expected profits from speculative operations, as this percentage is determined in advance according to the agreement between the two parties.
- Work between the two parties to the contract: The responsibilities and duties of each party are determined within the framework of the contract, and the business owner carries out speculative operations based on his experience and knowledge, while the owner of the money is provided with periodic reports and information on the performance of investments.
These elements are the essence of speculation in trade and determine the relationship and cooperation between the two parties during the investment period.
Speculation pillars
The pillars of speculation in trade are the basic elements that make up this strategy and determine its nature, and it includes the following pillars:
1. Frequent Buying and Selling: This involves speculators entering into rapid and frequent buying and selling deals to take advantage of price fluctuations in short periods of time.
2. Betting on fluctuations: profit in speculation depends on anticipating and exploiting fluctuations in the prices of financial assets or commodities. Speculators look for trading opportunities through which they can profit from price changes.
3. Use of Leverage: Leverage is used to increase trading power and enlarge trading positions. Speculators borrow from brokers to increase their trading capacity and make greater profits.
4. Risk Management: Speculators deal with the risks involved in trading operations, and adopt risk management strategies to limit potential losses. These strategies include setting limits to losses and using stop-loss orders.
5. Analysis and research: Speculators study and analyze markets and financial assets to identify appropriate trading opportunities. They rely on data, news, and technical and fundamental analysis to make investment decisions.
These pillars represent the main elements of speculation in trading, and require careful understanding and use to achieve success and profitability in this strategy.
Speculative trading strategies
The basic strategy in speculation is to achieve maximum positive results and profit. This is done through trade between speculative parties and mediated research and analysis. Mutual benefit is also achieved between the contracting parties in this process.
All forms of speculation require agreement and acceptance between the two parties. The common interest is achieved between the owner of the money and the owner of the experience after agreeing in advance on the percentages of profits. These percentages are also studied and analyzed in a manner consistent with the Sharia principles in Islam.
In this way, mutual benefits and legitimacy are achieved in the practice of speculation, the two parties aim to achieve profitability and success through this agreement and joint work within the framework of legal rules and provisions and the principles of justice and common interest.
When does speculation end in trading?
Certain cases have been formed that lead to the complete termination of the idea of speculation in trade, and life returns between the contracting parties as if nothing had happened in the beginning, and these cases include:
1. Expiration of the fixed term of the partnership: When the predetermined partnership period ends, the contract and mudaraba between the two parties also ends.
2. Termination of the contract by mutual consent or at the will of one of the parties: Any party to the contract has the right to terminate the partnership and speculation with the consent of the other party without defects. The owner of money or the expert can terminate the contract in an agreed manner, in accordance with the principles and provisions of the Sharia contract.
3. Loss of Funds: In the event of a significant loss of the speculative funds, this may lead to the termination of the speculation between the two parties.
4. Death or loss of capacity: If one of the partners dies or one of the parties loses his capacity, the partnership and mudaraba between the contracting parties may be terminated.
5. Isolation or neutralization of the owner of the money: If the owner of the money is dismissed or neutralized from the company and the speculative funds are cash, this may lead to the end of the speculation.
6. Due debts: In the event that the speculation ends and debts accumulate, the speculator has the right to receive the profits he has made and he must pay the debts due. If the debts are not paid, he is not entitled to take the profits.
These are some of the cases that can lead to the termination of speculation in trade between the contracting parties.
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