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  • 4 years ago

During the 1920's people were involved with over speculation in the stock market. What is over speculation and why was it a problem?

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  1. jagatuba
    • 4 years ago
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    Over speculation occurs when an investor purchases stock on the future earnings (or speculation) of the stock he already owns. For example, I own stock in Google, which has had a steady growth rate. I want to buy more stock in Google (or sometimes with another company) so I say, "Look. Google has has a growth rate of X% per year and I own $Y worth. In two years, my stock will be worth $Z according to the growth rate. So, give me $Z worth of stock right now and in two years I'll pay you back with interest." This is called “buying on margin.” The problem with this is that it creates an artificially inflated market not unlike the housing bubble we recently witnessed. You see the as more stock sells in a company the higher its worth. So if a bunch of us are buying stock on an anticipated future valued, not only are we making the value of the stock more than it is actually worth right now, we are creating a situation where if the stock does not continue it's speculated growth rate, none of us will have the money to pay back the stock that we bought. The only option left is for the company to reclaim the stock from us, but by this point the stock is more or less worthless anyway. This can result in huge losses for the investor as well as the company. This is a highly over-simplified explanation, but I believe I have captured the gist of the situation.

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