How did buying on the margin affected the great depression?

Answer 1

Consumer goods were not the only commodities that Americans bought on credit. buying stocks on margin had become very popular during the 1920s. in margin buying, an individual could purchase a share of a company's stock and use the promise of that share's future earnings to buy more shares. unfortuantely, many people abused this system to invest huge sums of imaginary money that existed only on paper. in the 1920s, more people invested in the Stock Market than ever before. stock prices rose so fast that by the end of the decade, people could become rich overnight just by selling or buying stocks. the buyer would hold the stock until the price rose and sell it for a profit. as long as the prices of stocks kept on increasing, the system worked. in 1928 and 1929, the value of stocks went up faster than the value of the companies the stocks represented. some experts warned that this bull market would end. in 1929, a few stock investors began to sell their stocks. seeing these few investors begin to sell,others soon followed creating a domino effect. the sudden selling caused the stock prices to fall. nervous brokers asked investors to pay their debts, but when they couldn't repay, they were forced to sell, causing the prices of stocks to fall even more. eventually, stocks lost more than 50% of their value and 16 million shares were sold at a lost.

Answer 2

A person paid a percentage of the cost of the stock to the broker. The rest of the money was provided by the broker. The broker then bought the stock for that person and his loan (the margin) would be paid back with interest when the stock was sold. This worked well while the market was safe and increasing in wealth. When the depression hit and the stocks on the market started falling in price, the brokers called in their "margin buyers" and demanded the money owed them from the original investment. As the stocks continued to fall in price, the people who had bought on margin did not have the money to pay what they owed the broker.

Answer 3

It was the #1 cause of the 1929 crash. You could buy $1,000 of stock "on margin" for ten percent - $100. It was expected the other 90% would be "made" by stock growth in short order - everything beyond that was profit. Soon, there were billions of dollars of stocks floating around that were worth 10% of what they said on the certificate - the other 90% of the money did not exist. That is a financial house of cards. And on October 29th, 1929, the house of cards collapsed.

Answer 4

There was over speculation in the Stock Market, which was not regulated.

Many Americans purchased stock on credit. This was known as margin buying. A consumer would purchase stock for a small amount, or pay nothing, and the stock broker would lend the consumer that money to purchase the stock. When the stock went up, the broker took what was owed him out of the selling price. Of course, this only worked when the stocks went up in price. When the market fell, the price of stocks went lower but the consumer still had to pay the broker on the price when the stock was purchased, so both the consumer and the brokers lost money, especially if the consumer could pay nothing on his loan.