How did speculation lead to the stock market crashing?

Answer 1

It was caused by Bush. People trusted Bush and began taking his advice and the next thing we know, we have a worldwide human disaster.

Some things never change I guess.

Answer 2

Radical4's answer covers some of it but not all of it.

For the most part he's talking about America's involvement in England's disastrous decision to go back to a gold standard.

But on the home front, the 20's were an interesting time. I don't recall the numbers, I think it was something like 100 to 500, but from 1920 to 1929, the Dow Jones grew an incredible amount. Not like more recent times, but back then a five-fold increase over ten years was unheard of.

Also, back then, there weren't the regulations there are now, and there were all sorts of funny games going on. For the general populace, the stock market seemed a sure thing. People were mortgaging their homes, their life savings, and to answer your question, speculation was running rampant.

In fact the fed had tightened the money supply in an attempt to thwart the amount of speculating that was going on.

Speculative purchasing is the idea that you can purchase a stock, hold if for awhile, and when the value increases, you sell it, and keep the profits.

Throughout the 20's this practice was rampant, and although it was not the only reason for the over-valued stock market, it certainly was one of the major reasons. Instant millionaires were made and things were so good many investors began buying on margin.

People weren't savvy investors, but that didn't stop them. Also, people were putting together dummy companies as a way to entrap investors. Even Joe Kennedy contributed to the crash.

If he wanted to increase the price of his shares, he'd buy (on credit) enough shares of a particular company to increase the price, then he'd sell, and make a hefty profit.

With all this profit by mirrors, fraudulent companies, speculation, and unsavvy buying, the market had become incredibly over valued. In 1929 the Fed and raised interest rates several times to try to stem the growth.

The prevailing belief on the part of the participants was that the stock market would always go up. Unfortunately the bear market commenced on the 24th of October, and panic selling began in ernest, and this created a snowball effect.

Once it was realized that the bubble had burst, there was mass selling. Most speculators were bankrupt almost immediately. Another problem was that the banks were also heavily invested in the stock market, and they lost their depositor's money. 10,000 banks failed during this crash!

The major reason for the crash was that there was a prevailing attitude that the stock market would always go up. Because of this, people bought and sold stocks on speculation, but because they believed it would always go up, they never did the research on the companies, and threw money at the stock market like they were buying candy.

But the stock market doesn't always go up, and at the time it was so over-valued that it had to go through a correction. But when it did, for the vast majority of buyers being unsophisticated at this, their mass behaviour caused panic-selling, and all hell broke loose!

It was people's attitudes toward the stock market as a continual sure thing, and certain unscrupulous practices, that at the time weren't illegal, that for the most part cause the crash.

Although speculative buying wasn't the only reason, over the entire decade, it was one of the major reasons for the market to be as over valued as it was.

Answer 3

It didn't.

This is one of the biggest lies I was taught in school. It attacks Capitalism for the cause of the stock market crash and the start of the great depression. What cause the market crash and depression was the actions of gvmt.

Here is a section of a report by Dr. Alan Greenspan.
"When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.

The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's."

Answer 4

Speculation lead to crashing of the stock market because the people will have a perception that there is no economic stability prompting them not to invest or stop buying stocks.

Answer 5

It didn't. Market crashes are the symptom of a credit bubble and credit bubbles are caused by fiat currency flooding the system with credit, which leads to too much money chasing too many stupid things.

Answer 6

A good example is the 17th century "tulip craze" in The Netherlands.Read this article.
http://www.wisegeek.com/what-is-a-tulip-craze.htm