Speculative trading V Investing

Updated: Sep 13, 2020

All trades / bets are speculative by nature as we are ultimately betting on virtual shares in real footballers with the aim that these shares will return dividends in the future.

However, some trades can be more speculative than others and many trades may be made without the intention of holding the player to earn dividends, but to sell to gain capital appreciation in the short term.

Speculative trading is sometimes criticized, but the market needs speculative traders to make the market move and to function. Good speculative trading is often rewarded with massive rewards for the risks taken.

Donny van de Beek is up 34% since being highlighted on the site less than 3 weeks ago due to speculation

Speculative Trading VS Investing

As covered above, all shares on Football Index are speculative. However, within the context of Football Index, we can still identify two different trading styles and most people will combine their trading strategy and their portfolio with a combination of the two.

In this context:

Investing in shares would be buying players to earn dividends and focusing on the intrinsic value of shares, often focusing more long term.

Speculatively buying shares would be buying to profit from capital appreciation with less of a consideration for dividends, often focusing more short term.

Investing in terms of Football Index:

  • Focuses on holding players longer term

  • Focuses on potential to earn dividends

  • Focuses on value

  • Benefits from market stability

  • Less concern for market trends

  • Less active trading

Key point: Investors on Football Index will often also be aiming to gain capital appreciation from their player increasing in price whilst also earning dividends

Neymar may be attractive to an investor as he has a proven record for earning dividends

Speculative trading in terms of Football Index:

  • Focuses on holding players short term

  • Focuses on gaining capital appreciation

  • Focuses on share price

  • Benefits from market volatility

  • More concern for market trends

  • More active trading

Phillips's price is built on speculation of changing circumstances in the future

Speculative market movements are often carried too far in either direction (Whether increasing or decreasing). Player's prices will often increase more due to the speculation of a chance of earning dividends than the amount that they are likely to earn in dividends. *This is why it is wise to sell when players have risen due to a trend when speculation is unlikely to continue in following months

Kalvin Phillips, a defensive midfielder, for Leeds united who is having another excellent season in the Championship has increased to £2.09 due to transfer speculation as well as the reported suggestions Kalvin Phillips is good enough to play for England in the future.

The reasons to buy Phillips are based on speculation of a change in future circumstance and although transfer speculation / an England call up in the seasons that follow could bring media dividends - he currently seems very overpriced when assessing his value.

Key Point: A player that appears to be overpriced when considering their intrinsic value may well continue to increase in price due to speculation

Below is an example of how similar players can be priced so differently due to speculation.

Kavlin Phillips is currently £2.09 whilst Harry Winks is £1.12

This is just one example amongst many of how much of an influence speculation plays in affecting a player's price.

*Phillips and Winks have only been chosen to be used as an example here as they were both submitted for a player review recently (which is where I noticed the similarities in the player’s characteristics and difference in price due to speculation.)

The point here is not necessarily that Phillips is overpriced, or Winks is under-priced as comparative pricing is not an effective method to judge value, but that speculation plays a huge part in why players on Football Index increase in price. Often an assessment of a player’s intrinsic value can become almost disregarded by many traders when there are extremely positive future influences causing speculation.

What often occurs is: speculative rises without a real justification in the underlying value of a player.

Ultimately, who is better value out of Phillips and Winks is a very different question to who is likely most likely to increase in price in the upcoming weeks?

Why does speculation influence prices so much?

The influence that speculation has on the market is clearly huge and the reasons why it is so huge may not help you profit as long as you understand the main risks with speculative trading (Which is mostly to avoid buying too late or holding onto a share too long).

Being far from an expert in psychology, the below may not explain what is happening perfectly but, can help to explain how speculation leads to such high price increases. A lot of it is due to human behaviour.

Assessing market activity to judge which players to buy

Considering which types of players are increasing or decreasing in the market can be hugely beneficial to help you find players likely to increase in price in the short term. Often buying a potentially valuable player at the right time is more profitable and therefore important than how valuable a player turns out to be.

Market Activity: Investing in terms of Football Index

Following the dividend announcement in October, we saw the market take more of an investment approach towards buying players. This was partly due to the market stability caused by the plans for the dividend increase. The dividend increase gave all players on Football Index increased potential value.

Proven players who had shown their ability to earn dividends or potential ability via high PB scores in the past were the main benefactors of the dividend announcement at first, as the market focused on objectively attempting to find value. Many young players dropped in price.

This then caused a snowball effect and led to what can now, looking back, be seen as a market trend. Many players whose price was built up only on past data have decreased since reaching high prices following the trend that followed the dividend increase. Some of these players may still represent excellent intrinsic value, but due to a lack of speculation of their chances of earning dividends increasing in the future – their prices may already full reflect the anticipation of their future dividend earnings and so capital appreciation in such players may remain limited in the short term.

As Benjamin Graham (One of the greatest investors that lived) said ‘The intelligent investor must never forecast the future exclusively by extrapolating the past’. It is often more profitable on Football Index to look forward than to look backwards.

Market Activity: Speculation and market trends

It is fairly clear to see that although dividends provide the underlying value of players and the speculation which often drives demand would not exist without this underlying value; it is the speculation and market trends caused by the potential to earn dividends which is often where the most profit can be made on Football Index - in the form of capital appreciation.

After all, all shares are speculative by their very nature of having the potential of earning future dividends with no guarantee of this. Furthermore, with so many ever changing, unpredictable factors to consider both in a player's career and in the platform of Football Index - we can not ever truly predict a player's intrinsic value and so speculation is always going to be at the heart of what drives price increases.

Longer term, buying players with strong intrinsic is a much safer way to trade to ensure your player actually holds value as otherwise no other trader would want to buy your share and you would be left with a worthless virtual share in a footballer. However, ss discussed, most shares are not held long term and as long as you get the timing right and understand the risks in buying such players - you can still be very profitable. Overall though, it is much better to buy players who are reasonably priced given their dividend potential and aiming to time the buying of these players right in relation to market trends and speculation.

Using a combination of speculative trading in value players to beat the market

Timing the purchase of shares in players, which could increase in price due to speculation of future events, correctly can be a recipe for profit on Football Index.

Many speculative trades are formed from anticipating market trends and further information on how to profit from market trends can be found here.

Being aware of how speculation or the influence of market trends becomes built into a player’s price is useful to avoid buying players who subsequently drop once the speculation is over.

The conclusive piece of advice on profiting from speculation is this:

  • Buy players who appear to be good value and host characteristics that could cause the speculation of improved future dividend returns at the time of purchase.

  • Avoid buying players who's chances of earning dividends is unlikely to change in the future and who's current market price already fully reflects what is being anticipated by the rest of the market

This method has been successful in beating the market over the last 6 months and seems to be a fairly low risk trading strategy, especially when avoiding players who have already increased recently in price. Only Gabriel Barbosa (who rose 23% shortly after being highlighted) has dropped more than 30p in price since being highlighted. Meanwhile over 85 players have increased over 30p since being highlighted with many increasing considerably more.

Many players highlighted on Football Index Club are very young and what is often overlooked when assessing intrinsic value of young players (And career dividends), is the amount of times throughout young player's careers that speculation, market trends and temporary good form will lead to short term price increases. By buying low and selling at the right time, you can be very profitable from trading many young players.

Quality, young players often continue to rise over time due to speculation. Davies was highlighted at £1.31 in Sep 2019

Of course, in what is such a rapidly growing platform - huge returns are to be expected, but with over 350 players being highlighted on the site, having just 1 player to have dropped more than 30p whilst so many players have risen huge amounts shows this strategy is sound. Furthermore, many players highlighted on the site continue to increase in price gradually over time even after their original spike due to a market trend. The average price increase across the 40 players highlighted in September 2019, currently stands at a huge 55% price increase.

*It is worth pointing out here that the few players that have dropped in price since being highlighted are players who no longer have speculative factors influencing their price and had already increased in price prior to being highlighted.

Spotting Opportunities due to cause and effect

Increases and decreases occur due to cause and effect and of course we can not predict or speculate exactly on what is going to happen. But, we can often predict how much of an influence a cause would effect a player's price due to the current market momentum and trends.

Due to the comparative pricing which often takes place during market trends, you can start to spot opportunities in players who if they were to be exposed to the market (Perhaps due to scoring a goal) would likely increase considerably more in price due to the trend than they otherwise usually would.

The recent increases in Eberechi Eze (Highlighted last Friday at £1.85) and Mounir Chouiar (Highlighted last Friday at £2.02) is a great example of this. Both players rose large amounts last Saturday due to scoring. It is unlikely their prices would have increased so much if they did not also fit the market trend at the time.

The opposite is also true. When a group of players who share similar characteristics are dropping in price due to momentum in the market shifting - a negative cause can cause the price decrease in a player to be amplified. For example, Pjanic and Sensi have decreased considerably recently due to injuries as well as both players being very much off-trend at the moment.

Final Points

Although, the players highlighted on Football Index Club will usually be from the lower end of the market – this strategy of buying players who could potentially be good value, but certainly suit a market trend clearly works with higher priced players too.

Jadon Sancho and Jack Grealish’s massive price increases in recent months can partly be explained by both players having the quality needed to potentially earn dividends, but, more crucially also have the added speculation of a potential transfer and involvement in EURO 2020 with England (Both of which could lead to further dividends in the future).

Grealish is an attractive hold to dividend potential and plenty of speculation

Factors to consider which could lead to a price increase due to speculation:

  • Transfer Speculation

  • Improved PB scores at a stronger side

  • International call up

  • More game time in the future (Especially young players)

  • Position change

  • Promotion to a PB league

  • Favourable fixtures

  • Change of manager

  • More games in the future (Tournaments)

  • More exposure (Games when few other players are playing / TV exposure *For example, players sometimes rise when highlighted positively on Match of The Day)

More on some of the key topics discussed can be found here:

Selling - https://www.footballindexclub.co.uk/post/knowing-when-to-sell

Managing Risk - https://www.footballindexclub.co.uk/post/managing-risk

Market Trends - https://www.footballindexclub.co.uk/post/how-to-profit-from-market-trends


© 2019 by Football Index Club

  • Facebook Social Icon
  • Twitter Social Icon