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Same reason they do today....leverage.
Buying say $1,000 of stock that you believe is going up...and it does say 20% earns you $200.
On margin, the same $1,000 may get you 3 times as much stock, so the same events makes you $600 - or 60%, (minus a small interest and carrying expense). The numbers aren't quite right, but the theory is. The SEC won't allow you to borrow more than half the purchase price of the stock you're buying on margin. If you have a margin account with a $5000 maintenance margin (the amount of money you MUST leave in the account) and you have $15,000 in there, you have $10,000 of usable cash. You may then borrow up to $10,000 on margin. The reason for this rule is, of course, because buying stock on margin is one of the major factors in the Great Depression.
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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 on margin in the 1920s?
When investors could buy stocks for as little at 10% down-payment and then when the stock rose in price they could sell it and make a profit.
What were the causes of the stock market crash of 1929?
The biggest reason for the Stock Market crash was margin trading. It's not the ONLY reason for the crash, but it's the biggest. Margin trading is where an investor buys stock with borrowed money. In the 1920s margin trading was unregulated. If you were a really good stock picker and you could convince your broker to loan you 90 percent of the sale price on this super hot stock you wanted to buy a million shares of, it was perfectly legal to do it. Let's talk of maintenance margin. When you buy on margin you have to maintain a certain amount of equity in your account - cash, stocks, pig futures, whatever. If the value of your equity drops below that maintenance margin value you have to put more money in your account. In 1929 the demand to put more money in was called the Broker's Call; today it's a Margin Call but it's the same thing: get down here with a lot of cash in your briefcase or we'll close your account. When stocks started dropping a lot of broker's calls were made to people whose entire net worth was in stocks bought on margin. And a lot of THOSE people were banks, who were leveraged up to their necks in margin-bought stocks.
What were some of the causes of the 1929 stock market crash?
The biggest reason for the stock market crash was margin trading. It's not the ONLY reason for the crash, but it's the biggest. Margin trading is where an investor buys stock with borrowed money. In the 1920s margin trading was unregulated. If you were a really good stock picker and you could convince your broker to loan you 90 percent of the sale price on this super hot stock you wanted to buy a million shares of, it was perfectly legal to do it. Let's talk of maintenance margin. When you buy on margin you have to maintain a certain amount of equity in your account - cash, stocks, pig futures, whatever. If the value of your equity drops below that maintenance margin value you have to put more money in your account. In 1929 the demand to put more money in was called the Broker's Call; today it's a Margin Call but it's the same thing: get down here with a lot of cash in your briefcase or we'll close your account. When stocks started dropping a lot of broker's calls were made to people whose entire net worth was in stocks bought on margin. And a lot of THOSE people were banks, who were leveraged up to their necks in margin-bought stocks.
Which of these describes the process in which investors can buy stocks worth much more than they have to pay for them?
buying on margin A+
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.
Why did many investors buy stocks on speculation in the late 1920s?
Buyers hoped to make a quick profit.
Where could people buy and sell stocks in companies?
Where could people buy and sell stocks in companies?
What does it mean to buy stocks on margin?
Margin means you're borrowing money to buy stock. It's also one of the few ways you can lose more in the stock market than you invested in the first place.
What does it mean to buy stocks''on margin''?
Margin means you're borrowing money to buy stock. It's also one of the few ways you can lose more in the stock market than you invested in the first place.
What where two reason for poverty in the 1920s?
Stock market crash due to buying on margin and overextention of credit to buy consumer goods.
How did buying on margin allow more people to invest in the stock market?
Buying on margin allowed more people to invest in the stock market by enabling them to borrow money to purchase stocks. With a margin account, investors could put down only a fraction of the total cost of the shares they wanted to buy, typically around 10%, and borrow the rest from a broker. This allowed individuals with limited capital to have greater purchasing power and participate in the stock market.
