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Buying On Margin Great Depression

Buying On Margin Great Depression >>>

Buying On Margin Great Depression

Some of the signs that a basically unsound economy had both caused and fueled the Depression were easier to see after the Great Crash. They included an increase in unemployment, cuts in industrial production, and an increase in consumer borrowing, especially the practice of buying stocks on margin.

The events of Black Thursday are normally defined to be the start of the stock market crash of 1929-1932, but the series of events leading to the crash started before that date. This article examines the causes of the 1929 stock market crash. While no consensus exists about its precise causes, the article will critique some arguments and support a preferred set of conclusions. It argues that one of the primary causes was the attempt by important people and the media to stop market speculators. A second probable cause was the great expansion of investment trusts, public utility holding companies, and the amount of margin buying, all of which fueled the purchase of public utility stocks, and drove up their prices. Public utilities, utility holding companies, and investment trusts were all highly levered using large amounts of debt and preferred stock. These factors seem to have set the stage for the triggering event. This sector was vulnerable to the arrival of bad news regarding utility regulation. In October 1929, the bad news arrived and utility stocks fell dramatically. After the utilities decreased in price, margin buyers had to sell and there was then panic selling of all stocks.

There are three topics that require expansion. First, there is the setting of the climate concerning speculation that may have led to the possibility of relatively specific issues being able to trigger a general market decline. Second, there are investment trusts, utility holding companies, and margin buying that seem to have resulted in one sector being very over-levered and overvalued. Third, there are the public utility stocks that appear to be the best candidate as the actual trigger of the crash.

My conclusion is that the margin buying was a likely factor in causing stock prices to go up, but there is no reason to conclude that margin buying triggered the October crash. Once the selling rush began, however, the calling of margin loans probably exacerbated the price declines. (A calling of margin loans requires the stock buyer to contribute more cash to the broker or the broker sells the stock to get the cash.)

For simplicity, this discussion has assumed the trust held all the holding company stock. The effects shown would be reduced if the trust held only a fraction of the stock. However, this discussion has also assumed that no debt or margin was used to finance the investment. Assume the individual investors invested only $162.50 of their money and borrowed $162.50 to buy the investment trust stock costing $325. If the utility stock went down from $162.50 to $50 and the trust still sold at a 100% premium, the trust would sell at $100 and the investors would have lost 100% of their investment since the investors owe $162.50. The vulnerability of the margin investor buying a trust stock that has invested in a utility is obvious.

Because people were buying on the margin and because they were overconfident about the prospects for the stocks, they were willing to pay inflated prices for the stocks. This made stock prices go up more than they should have. Eventually, the bubble burst and stock prices dropped.

Buying stocks on margin is not something new; people have been doing it for a long time. Just before the great depression in the 1930s, investors were allowed to buy stocks with just 10% margin (meaning you put in $1,000 if you wanted exposure of $10,000). That was one of the major reasons why the economy went out of whack during that time. People borrowed too much and were forced to sell their positions due to margin calls, which forced the prices down.

Which economic factor contributed most directly to the start of the Great Depressiona. low worker productivityb. high income taxesc. decreasing tariff ratesd. buying stocks on margin

Do you know that margin accounts involve a great deal more risk than cash accounts where you fully pay for the securities you purchase Are you aware you may lose more than the amount of money you initially invested when buying on margin Can you afford to lose more money than the amount you have invested

Aspeculative boom had taken hold in the late 1920s, which led hundreds ofthousands of Americans to invest heavily in the stock market. Many investorsbought shares "on margin," meaning to purchase them on credit whileat the same time taking out loans to pay for those shares. Investors hoped thatwhen the shares sold, they would make enough money to pay back the loans andinterest, while also leaving some profit for themselves. By August 1929, brokerswere routinely lending small investors more than two-thirds of the face valueof the stocks they were buying. The loans exceeded $8.5 billion, more than theentire amount of currency circulating in the U.S. at the time.

Therising share prices encouraged more people to invest, hoping the share priceswould rise further. Speculation thus fueled further rises andcreated an economic bubble. Because of margin buying,investors stood to lose large sums of money if the market turned down, orfailed to advance quickly enough. With the Dow Jones Industrial Average, amajor U.S. stock market index, just past its September 3 peak of 381.17, themarket finally turned down and panic selling started at the New York StockExchange, the primary center of American financial activity located on WallStreet in New York City. On October 24, 1929, also known as Black Thursday, thevalue of common stock and shares in the U.S. market dropped by 40% and amassive, debilitating economic downward spiral was set in motion.

The five main causes of the Great Depression were the Stock Market Crash of 1929, buying stocks on margin, excessive borrowing by individuals and corporations, the decline of the agricultural industry, and lack of government action under the Hoover administration.

The 1920s were prosperous and exciting years, leading them to be dubbed the 'Roaring Twenties.' Throughout this decade, buying stock and investing were popular activities. There was a lot of money to be made by playing the stock market, and investors increasingly began engaging in risky, speculative practices. One of these risky practices was called buying on margin. This refers to a buyer paying for stock by putting some of his own money down, but borrowing the rest from a broker. During the 1920s, a buyer only had to put down between 10 and 20 percent and was free to borrow the rest. This practice, however, was extremely risky. If the price of the stock fell lower than the amount of the loan, both the buyer and the broker would be in trouble. By 1929, over 8.5 billion dollars were out on loan. Nevertheless, many people honestly believed that the stock market would continue to rise indefinitely. This was in spite of economic indicators, such as slowing industrial production and falling wages for those working in agriculture.

The United States was a central part of the international economic system, and its national economic disaster could not be contained. It spread across the globe. It hit particularly hard in Europe where multiple nations were indebted to the United States. During World War I, the Allies (Britain and France) had bought a great deal of military weapons and products using loans from the United States. When the United States called for those loans to be repaid to stabilize its own economy, it threw foreign economies into economic depression as well.

Buying on margin can increase your buying power. Trading large companies is nearly impossible with a small account. Amazon (NASDAQ: AMZN), for example, trades for almost $2,000 a share. If you only have a $2,000 account, you can only buy one share of AMZN.

There was overproduction in the industrial sector as well. While the upper 1 percent was doing very well, those farther down the income scale were not doing as well and many were buying cars, appliances and other products on credit. Additionally, many Americans had been buying stocks on margin and when the stock market collapsed, they saw their equity plummet and they stopped buying goods and services; in the first half of 1930, consumers cut their expenditures by ten percent. Companies were afraid to invest in new capacity or products, and they too stopped spending.

Most Americans aren't stock owners—they have their money in banks. But the banks have been lending out their money to speculators in the stock market. And so when large numbers of depositors suddenly want their cash, the banks don't have it to give. Thousands of banks simply close their doors . Factories close. People stop buying cars, they stop building houses. They have no money. What's happening We're having a depression. And like a depression of the mind, it seems like there is no way out. And it is growing—not only in our country, but in the rest of the world as well. This financial calamity will be called the Great Depression. 59ce067264


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