US_Ch7_webquest-2-speculation

=**Understanding Speculation**=

It's important to understand what is meant by speculation. This is done today in the oil industry. How it works (with oil today) is that oil investors take a look at the future and basically guess what the price per barrel will be in the future. Oil producers and refineries change their prices based on these speculators. Is there anything wrong with that? Depends on who you ask. Some say these oil speculators give good estimates on the price while others say they bid the price higher any chance they can and we pay the price at the pump.

In terms of the depression, here's what the myth accuses speculators of doing:

1. I invest in a business...say Ford Motor Company.

2. I guess (speculate) that the profits of Ford will increase...this makes the price of one share of Ford stock go up because if Ford's profits go up their stock becomes more valuable.

3. The evil speculator that I am (with my partners in crime) guess (speculate) that profits will rise at gigantic rates...more and more people buy Ford stock....I along with my partner sell our stock while the price is high...when the price is high it costs more to buy stock, but when you sell you get to sell at the higher price...that's how you make money on the stock market - by investing in companies that will earn profits.

4. Myself and my partners made a lot of money - then reality in the true Ford profits bring the price of Ford stock back down to reality - it was high because me and my partners bid it up higher than it should've been and people believed me.

5. Those who bought Ford stock when it was higher would lose out...possibly entire savings.

This assumes that regular people who invested in the stock market didn't pay attention. This scenario is part of the whole myth. There was very little speculation, but nothing that helped cause the depression.

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