In determining whether or not you may have a claim for your investment loss, you should think about whether or not your lost investment was speculative or non-speculative. Speculative investments are those investments that carry significant risk after a thorough analysis. It is possible that the purchaser will lose the principal amount in a speculative investment. Financial speculation can involve buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives, or any valuable financial instrument to profit from fluctuations in its price, regardless of its underlying value. Investment strategies that are speculative carry a high risk of loss of any unrealized profit loss as well as the principal investment itself.
Certain investment strategies can demonstrate an investor as being non-speculative. These include hedging strategies that minimizes the risk of a speculative strategy by minimizing the risk of loss. Hedging could involve trading an asset whose price has a mathematically defined relation with a speculative investment, such as a call or a put option. The purchase of a call or a put option on a security gives the buyer the right to purchase the underlying security at a given price in the future. If the price of an underlying security rises, the value of a call on that security will rise at a rate much greater than the underlying value (or if the price falls, the value of a put option will rise). Arbitrage is another type of hedging strategy, involving the simultaneous purchase and sale of identical or equivalent investments across two or more markets in order to benefit from a discrepancy in their price relationship.
A straddle is a similarly non-speculative investment strategy, which involves purchasing both a call option and a put option on a stock that is bought at the same strike price and expires at the same time. This benefits the investor as long as the market moves by a large amount in either a positive or negative direction. These different variations of hedging strategies are considered non-speculative because risk of loss to the investor is minimized by the overall value of the investor’s portfolio at any given time. Another important feature of non-speculative trading is diversification and liquidity. If an investor’s portfolio is diversified, their risk of complete loss of their investment is minimized. Similarly, if an investment is liquid, the risk of loss to that investment can be said to be non-speculative because the investor can still get realize the value of that investment by getting it back. If investments are made in illiquid products, however, those investments remain at a higher risk of loss because the value cannot be realized.
It is very important for an investor to understand speculative vs. non-speculative trading, and to communicate a distinct strategy to their brokerage firm. If an investor is risk-adverse, they should communicate this to their broker. If a broker implements a speculative strategy, their client is a non-speculative investor, and the investor sustains a loss, the investor may be entitled to that loss under securities laws. If an investor is able to articulate a non-speculative trading strategy to their broker, the broker needs to follow that strategy because to fail to do so would be unsuitable under the law. A broker also has a duty to tell the truth about whether their investment strategy is speculative or non-speculative. If an investor has instructed their broker to follow a non-speculative investment strategy, and their broker has followed a speculative strategy, or has lied about what strategy they have used, the non-speculative investor may have a serious claim that they can bring before the Financial Industry Regulatory Authority (FINRA) through arbitration procedures.