The stock market was established as a system for buying and selling shares of

The stock market was established as a system for

This preview shows page 4 - 6 out of 22 pages.

White House also drove stock prices to new highs. The stock market was established as a system for buying and 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. In the late 1920s a prolonged bull market convinced many Americans to invest heavily in stocks. By 1929 about 3 million Americans, or roughly 10 percent of households, owned stocks. As the market continued to soar, many investors began buying stocks on margin, meaning they made only 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 come as 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 borrowed money to buy $10,000 worth of stocks had to wait only a short time for them to rise to $11,000 in value. The investor could then sell the stock, repay the loan, and make $1,000 in profit. The problem came if the stock price began to fall. To protect the loan, a broker could issue a margin call, demanding the investor repay the loan at once. As a result, many investors were very sensitive to any fall in stock prices. If prices fell, they had to sell quickly, or they might not be able to repay their loans. Before the late 1920s, the prices investors paid for stocks had generally reflected the stocks’ true value. If a company made a profit or had good future sales prospects, its stock price rose, while a drop in earnings or an aging product line could send the price down. In the late 1920s, however, hordes of new investors bid prices up without regard to a company’s earnings and profits. Buyers, hoping to make a fortune overnight, engaged in speculation. Instead of investing in the future of the companies whose shares they bought, Reading Check Herbert Hoover The nation and its new president felt confident about the future in early 1929. Why were Americans so optimistic? History
Image of page 4
The Great Depression speculators took risks, betting that the market would continue to climb, thus enabling them to sell the stock and make money quickly. Summarizing What was the stock market like in the 1920s? The Great Crash The bull market lasted only as long as investors continued putting new money into it. By the latter half of 1929, the market was running out of new cus- tomers. In September professional investors sensed danger and began to sell off their holdings. Prices slipped. Other investors sold shares to pay the inter- est on their brokerage loans. Prices fell further. TURNING POINT Crash! On Monday, October 21, Groucho Marx, the comic star of stage and screen, was awakened by a telephone call from his broker. “You’d better get down here with some cash to cover your margin,” the broker said. The stock market had plunged. The dazed comedian had to pay back the money he had borrowed to buy stocks, which were now selling for far less than he had paid.
Image of page 5
Image of page 6

You've reached the end of your free preview.

Want to read all 22 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture