White House also drove stock prices to new highs. Thestock marketwas established as a system for buyingand selling shares of companies. Sometimes circum-stances in the stock market lead to a long period of ris-ing stock prices, which is known as a bull market.Inthe late 1920s a prolonged bull market convincedmany Americans to invest heavily in stocks. By 1929about 3 million Americans, or roughly 10 percent ofhouseholds, owned stocks.As the market continued to soar, many investorsbegan buying stocks on margin,meaning they madeonly a small cash down payment—as low as 10 per-cent of the price. With $1,000 an investor could buy$10,000 worth of stock. The other $9,000 would comeas a loan from a stockbroker, who earned both a com-mission on the sale and interest on the loan. The bro-ker held the stock as collateral. As long as stock prices kept rising, buying on mar-gin was safe. For example, an investor who borrowedmoney to buy $10,000 worth of stocks had to wait onlya short time for them to rise to $11,000 in value. Theinvestor could then sell the stock, repay the loan, andmake $1,000 in profit. The problem came if the stockprice began to fall. To protect the loan, a broker couldissue a margin call,demanding the investor repay theloan at once. As a result, many investors were verysensitive to any fall in stock prices. If prices fell, theyhad to sell quickly, or they might not be able to repaytheir loans.Before the late 1920s, the prices investors paid forstocks had generally reflected the stocks’ true value. Ifa company made a profit or had good future salesprospects, its stock price rose, while a drop in earningsor an aging product line could send the price down. Inthe late 1920s, however, hordes of new investors bidprices up without regard to a company’s earnings andprofits. Buyers, hoping to make a fortune overnight,engaged in speculation.Instead of investing in thefuture of the companies whose shares they bought,Reading CheckHerbert HooverThe nation and its new president felt confident about thefuture in early 1929.Why were Americans so optimistic?History
The Great Depressionspeculators took risks, betting that the market wouldcontinue to climb, thus enabling them to sell the stockand make money quickly.SummarizingWhat was the stockmarket like in the 1920s?The Great CrashThe bull market lasted only as long as investorscontinued putting new money into it. By the latterhalf of 1929, the market was running out of new cus-tomers. In September professional investors senseddanger and began to sell off their holdings. Pricesslipped. Other investors sold shares to pay the inter-est on their brokerage loans. Prices fell further.TURNING POINTCrash!On Monday, October 21, Groucho Marx, thecomic star of stage and screen, was awakened by atelephone call from his broker. “You’d better getdown here with some cash to cover your margin,”the broker said. The stock market had plunged. Thedazed comedian had to pay back the money he hadborrowed to buy stocks, which were now selling forfar less than he had paid.