Economic Crisis of 2007-2008
For quite a long time already, financial speculation has been something that people perform in order to get substantial amount of money. It may sound very simple. However speculating is actually really perplexing. A legendary investor named Benjamin Graham once tried to distinguish between an investment and a speculation. “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative," explained Benjamin Graham in his book “Security Analysis” . Also, according to Dreyfus, speculation means assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss .
By looking at Graham’s definition of speculation, it may be confusing why people still wants to speculate despite the fact that investing is safer and still sufficiently profitable. The answer can be found within Dreyfus’ definition as speculators hope that their financial instruments gain much more than if they do a safe investment. Moreover, there have been success stories about people speculating in the past twenty years, particularly during the dot-com bubble as in 1999, big company stocks grew an average of 25 percent, and small-company stocks averaged a blistering 50 to 70 percent . Nevertheless, people sometimes become too aggressive with those risky and speculative investments that they deemed to be “bullish” or profitable in the short term. They forgot that their investment value might crash, and when that really happen, these speculators practically lost their shirts and steeply bring the economy down. Examples of this sharp value crash include a few short years after the dot-com bubble when most of the dot-com companies fell 90% or more from their highs, with many more going bankrupt , and most recently during the subprime mortgage crisis in 2007. The consequence of subprime mortgage crisis is...