How does buying on the margin contribute to the stock market crash?

Answer 1

In short, a person is buying with money they do not have, but are borrowing from their broker. A person does that so as to buy more of a stock they believe will go up in value. A broker does this because he assumes that the person has more information on this than he does, and wants to make money, too.

However, not all stocks go up in value, some decline. And then the person and broker are compelled to sell what stocks they have to cover the losses. If stock prices were already going down across the board, the dumping of another amount of stocks on to the market exacerbates this downward trend.

The above answer is very short, very simplistic and very generalized - I know, I'm the one who just wrote it. It will do for general purposes. For greater detail, Google "margin" or consult a competent financial analyst in your area. So long as you are simply asking for information purposes, there are probably some college economic professors or local bankers who'd be more than happy to assist.

Answer 2

Many Americans purchased stock on credit. This was known as margin buying. Stock brokers offered the possibility of purchasing stock on an instalment plan in which there were no installments to pay. The buyer would purchase so many shares of a company and pay a portion of the cost as a down payment. The rest of the cost would be subtracted by the Stock Broker when the buyer sold the stock to make a profit. Sometimes a bank would provide a loan to the buyer with the stock as collateral. The money the speculator owed was known as the margin. The system worked until stocks started to fall and the selling of the stock did not cover the amount owed by the speculator.