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Definition: Speculation from The AMA Dictionary of Business and Management

Practice of engaging in risky financial transactions, especially in a stock market, in an attempt to profit from short-or medium-term fluctuations in their market value. It absorbs excess risks, which may be offset by larger profits in the future.

Summary Article: speculation
From The Columbia Encyclopedia

practice of engaging in business in order to make quick profits from fluctuations in prices, as opposed to the practice of investing in a productive enterprise in order to share in its earnings. The term is sometimes applied to investment in a venture involving abnormal risks along with the chance to earn unusually large profits, but most speculation consists in the buying and selling of commodities and stocks and bonds with the object of taking advantage of rapid changes in price. While the investor seeks to protect his principal as it yields a moderate return, the speculator sacrifices the safety of his principal in hopes of receiving a large, rapid return. The practice is defended as tending to stabilize prices and guide investment; it is attacked as the mechanism of financial crisis and panic when prices decline rapidly and as an inflationary factor when a commodity is in shortage and speculation drives up its price.

Public outcry over speculation has had an important political impact in several periods of U.S. history. During the progressive era in the late 19th and early 20th cent., speculation on Wall Street helped reformers led to landmark legislation regulating big business. Following the crash of 1929, which was widely blamed on the speculative abuses of the 1920s, the Roosevelt administration passed legislation regulating Wall Street and the banking industry. In the 1980s and early 1990s, critics attacked junk bonds, corporate mergers, and the savings and loan industry as examples of speculative abuses that reduced America's economic competitiveness. In the late 1990s speculation was most evident in the enormously high market value attained by some Internet and computer company stocks and in the on-line day trading of stocks.

See also banking; margin requirement; panic.

  • See Sobel, R. , Panic on Wall Street (1968);.
  • Mayer, M. , Markets (1988);.
  • Kindleberger, C. , Manias, Panics, and Crashes (1989);.
  • Chancellor, E. , Devil Take the Hindmost (1999);.
  • Millman, G. J. , The Day Traders (1999);.
  • Morris, C. R. , Money, Greed, and Risk (1999);.
  • Shiller, R. J. , Irrational Exuberance (2000).
The Columbia Encyclopedia, © Columbia University Press 2018

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