Financial Dictionary -> Investing -> Speculation

In business and finance, speculation is a process by which a small amount of opinion, not always based on fact and sometimes based on fraud, causes a widespread opinion in the market place, which results in mass growth or mass decline. It is often applied to the stock market, but is related to all sorts of financial and none financial occurrences.

Using the stock market as an example, Bob gets word that the company he is invested in might be about to fold, so he tells some of his friends that are also investors. As they then tell their friends this speculation causes a widespread panic throughout the market place and virtually all the investors pull out causing the company to plummet. This is obviously a simplified vie was the internet, news and other outlets help to spread the speculation.

Often the speculation is based on real facts and figures, although for their own financial gain some people deliberately start speculating on a company or its stocks to defraud the system. The previously mentioned scenario if started by a fraudster may then result in this fraudster buying up a huge portion of the shares, making him a killing when the value rises.

Speculation is not always done on mass or for defrauding the system, it may simply be one person getting cold feet and selling their stock or another person buying stock because their personal analysis of the market leads them to think its value will go up. This is just part of the risk associated with the stock market and without it there would be no money in trading on the stock exchange.

However income instances mass speculation can cause economic crisis such as the United States bank runs in 1931 when speculation about the security of the banks caused virtually everyone to withdraw their money. This also happened in 2008 with the British bank Northern Rock, which ultimately fell to privatization.