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How did buying stocks on margin contribute to the stock market crash?
Wiki User
∙ 9y ago
You could buy stock without paying full price for it. People over bought, inflated prices and didn't have the money to pay for the stock when the time came to put up the cash.
The housing market was some what the same. People were asked to pay a million dollars for a home worth 1/2 of that amount.
Wiki User
∙ 9y ago
Wiki User
∙ 11y agoIf you buy a stock on the margin at $100 (and only have $20 in your account) and the stock drops to $50, you still owe $80 but you can only sell the stock for $50.
If everybody does this, no one has any money to buy, and prices keep going lower, and people lose more and more money on paper and try to sell to cover their losses. That's where a panic comes in.
Think of it this way--if you owe more on credit cards than you can pay off, ever, your only real choice is to go bankrupt. Now imagine everyone going bankrupt all at once. That would be a great depression.
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Explain why buing on margin can be a profitable system?
Buying on margin is profitable in a bull market especially when the stocks pay a high dividend.
How did buying on margin allow more people to invest in market?
Buying on margin allow people to buy more stocks with only a fraction of the cash needed to buy those stocks. These allowed more people to invest in the stock market that would not afford to come up with the full cash to buy the stocks in question.
Buying stocks on credit is called?
margin
The purchase of stocks and bonds is?
buying on margin
Which situation helped cause the stock market crash of 1929?
People bought stocks on margin. Wages dropped for most workers The housing market declined.
Buying on margin was a method of buying stocks?
with mostly borrowed money
Why did buying stocks on margin in the 1920's not only cripple the stock market but investors as well?
The question of whether buying stocks on margin eventually leads to severe market pullbacks has been the subject of intensive debate. Bull markets are typically associated with rising margin debt as Investors buy stocks on margin to leverage gains through the use of debt. The increased stock buying permitted by margin debt contributes to the strength and longevity of a bull market but this reverses during market pullbacks if investors receive margin calls and are forced to liquidate stocks. Margin buying by itself is not a dangerous practice and there have been prolonged periods during which margin debt remained at high levels and the stock market continued higher. The problem associated with margin debt is that a sudden adverse macro economic event that panics investors into selling causes prices to drop which can put margin buyers into a negative equity position. At this point the forced liquidation of stocks due to margin calls that cannot be met results in a self perpetuating event whereby lower prices force more selling which in turn causes further price declines. It can therefore be argued that margin debt per se does not cause a market selloff but can result in a steeper price decline than would have occurred if margin debt did not need to be liquidated.
What does stocks on margin mean?
05/08/08 Buying on margin means that you are buying your stocks with borrowed money_______________________________________________________________It means that you've borrowed money to finance your stock purchase. This is very risky and may lead to a margin call if the share price declines.
Buying stocks on the chance of a quick profit without considering risks is known as?
buying on margin.
The practice of buying stocks with an initial down payment of only 10 of the stock price was known as?
buying on margin
When would an investigator not want to purchase stocks by buying on margin?
When he anticipate high volatility as it may lead to squaring of his stocks or positions due to decrease in minimal margin to support the position.
What is wrong with buying stock on margin?
There is nothing wrong in buying stocks on margin. What the investor must recognize is that there is more risk involved. Aside from the purchased stocks going down, the added burden is having to pay interest on the borrowed funds or the "margin". The other danger is that an investor using margin can buy more stocks. Over speculation can either vastly be beneficial or be a personal income disaster.
