Question

What are the similarities and differences between hedging and speculating?

Answer 1

Futures contract is primarily used by hedgers, speculators, and arbitrators, who play a pivotal market role. In this context, people often juxtapose the terms hedging and speculation as they are in the way connected with unforeseen price movements, but in a number of reasons they differ. Hedging is done by the hedgers to shield themselves against the danger or to claim to reduce the probability of shifts in the price of the product underlying it. On the contrary , in an effort to gain income from the shifts in the gap between future price and spot price, speculators conduct betting, because they gamble on their gap. Thus, the risk is deliberately taken in order to reap money.

Hedging is the act against unexpected market shifts that prevent an investment. Speculation is defined as the mechanism in which the speculators trade in an underlying asset of the high-risk dimension to gain income.
Hedging is an instrument for controlling or eliminating risk. Instead, investment depends on danger, hoping to make good returns.
Hedging offers protection against undesired fluctuations in prices. Speculation, on the other hand , means incurring risk in order to gain income from market shifts. Hedgers are averse to risk, which secures their investment by hedging. Speculators are risk lovers, who deliberately take risks and play a critical role in delivering market liquidity.