Speculation is the act of buying something at a low price in the hope of reselling it later at a profit. One way people make money off stocks is through speculation. They buy them at one price. Then when the stock’s price goes up, they sell their stock at a profit.
Between 1920 and 1929 prices on the New York Stock Exchange, the nation’s largest stock market, steadily increased. As a result, stock market speculators became very wealthy. Many of them realized if they borrowed money, then they could buy even more stock. After these investors sold their stock, they could repay their loans and still clear larger profits. This practice of buying stock on credit was called buying stock on margin.
Margin buying led to over speculation in the stock market. When the market dropped, investors who had bought stock on credit found themselves in a difficult position. The terms of their loans allowed their creditors to demand enough money to cover the stock’s original value. This forced investors to sell even more stock, which caused stock prices to drop even further. This downward cycle continued until the New York Stock Exchange crashed.