Greater Fool Theory

AAA

DEFINITION of 'Greater Fool Theory'

A theory that states it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price.

INVESTOPEDIA EXPLAINS 'Greater Fool Theory'

When acting in accordance with the greater fool theory, an investor buys questionable securities without any regard to their quality, but with the hope of quickly selling them off to another investor (the greater fool), who might also be hoping to flip them quickly. Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in share price due to the selloff.

RELATED TERMS
  1. Bird Dog

    A real estate investing term that refers to someone who spends ...
  2. Overbought

    1. A situation in which the demand for a certain asset unjustifiably ...
  3. Overvalued

    A stock with a current price that is not justified by its earnings ...
  4. Speculative Bubble

    A spike in asset values within a particular industry, commodity, ...
  5. Fully Valued

    A stock whose price analysts believe reflects the market's recognition ...
  6. Flipper

    1. A short-term investor or day trader who buys pre-IPO shares, ...
RELATED FAQS
  1. What kind of assets can be traded on a secondary market?

    Virtually all types of financial assets and investing instruments are traded on secondary markets, including stocks, bonds, ... Read Full Answer >>
  2. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  3. What constitutes a secondary market?

    A secondary market covers the trading of any good, commodity, security or asset after it has been issued or created. Although ... Read Full Answer >>
  4. What percentage of a diversified portfolio should large cap stocks comprise?

    The percentage of a diversified investment portfolio that should consist of large-cap stocks depends on an individual investor's ... Read Full Answer >>
  5. How are American Depository Receipts (ADRs) exchanged?

    American depositary receipts (ADRs) are bought and sold on regular U.S. stock exchanges, either in the over-the-counter market ... Read Full Answer >>
  6. What are the differences between global depositary receipts (GDRs) and American depositary ...

    A global depositary receipt (GDR) is a bank certificate issued in multiple countries for shares in a foreign company. The ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    7 Controversial Investing Theories

    We take a closer look at the theories that attempt to explain and influence the market.
  2. Economics

    5 Steps Of A Bubble

    Bubbles are deceptive and unpredictable, but by studying their history we can prepare to our best ability.
  3. Options & Futures

    Market Problems? Blame Investors

    Investors are only human, and their irrational behavior can often move the market.
  4. Budgeting

    The Greatest Market Crashes

    From a tulip craze to a dotcom bubble, read the cautionary tales of the stock market's greatest disasters.
  5. Trading Strategies

    Uncovering Evidence Of Sector Rotation

    Stalk ETF performance lists over several weeks to uncover hidden institutional buying and selling strategies.
  6. Stock Analysis

    Is Apple's (AAPL) Selloff Justifiable or Panic?

    Apple has minted millionaires over the past decade, but there is one current risk that might soon bring this to an end at least temporarily.
  7. Investing

    Strategies Activist Shareholders Follow

    Activist shareholders, also called activist investors, are large-scale investors who use their investment power to influence public companies. While their goals can vary widely, the strategies ...
  8. Economics

    Do Transport Stocks Signal a U.S. Selloff?

    The Dow Jones Transportation Average index has underperformed the broader DJ Industrials Average, leading some market watchers to speculate a selloff.
  9. Professionals

    Value or Growth Stocks: Which is Best?

    The answer to the age-old growth versus value debate depends on a number of factors. Here's what to consider.
  10. Investing Basics

    Today's Top Young Investors

    Given the very different world that we live in as compared to the one the Warren Buffett graduated into, young, hopeful investors should be looking up to people closer to their own age.

You May Also Like

Hot Definitions
  1. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  2. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  3. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  4. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  5. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
  6. Himalayan Option

    An exotic equity option belonging to a class known as mountain range options. Himalayan options are based on a basket of ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!