How did the practices of buying on margin and speculation cause the stock market to rise?
Do you know what buying on margin and speculation mean?
Buying on margin is borrowing money from a broker to purchase stock.
Buying on speculation is taking risks and throwing caution to the wind by investing in stocks, in hopes that the market would continue to rise.
Right.
Do you see how having borrowed money and being reckless can cause the stock market to rise? People buy more stocks, the price goes up; still more people buy more stocks, hoping to make a lot of money.
But the stock market goes up and down. Eventually people run out of money to buy stocks and start to sell -- and sell -- and sell. The bottom drops out of the stock market! Voila! A recession or a depression! People can't pay off their debts and go bankrupt!
The first lesson everyone should learn about the stock market is that it goes up and down.
Okay.
So the answer is...
The practice of buying on margin allowed people to leverage their cash to as much as ten times the amount, with a loan from their broker. It allowrd for more money to flow into the stock market, causing individual stocks to rise. The practice of buying on speculation also caused the stock market to rise as it drove up market prices beyond the stocks’ value.