Margin Buying Definition 1920s
Margin Buying Definition 1920s - https://byltly.com/2tE5bQ
For example, Jane sells a share of stock she does not own for $100 and puts $20 of her own money as collateral, resulting $120 cash in the account. The net value (the cash amount minus the share price) is $20. The broker has a minimum margin requirement of $10. Suppose the share price rises to $115. The net value is now only $5 (the previous net value of $20 minus the share's $15 rise in price), so, to maintain the broker's minimum margin, Jane needs to increase this net value to $10 or more, either by buying the share back or depositing additional cash.
The events of Black Thursday are normally defined to be the start of the stock market crash of 1929-1932, but the series of events leading to the crash started before that date. This article examines the causes of the 1929 stock market crash. While no consensus exists about its precise causes, the article will critique some arguments and support a preferred set of conclusions. It argues that one of the primary causes was the attempt by important people and the media to stop market speculators. A second probable cause was the great expansion of investment trusts, public utility holding companies, and the amount of margin buying, all of which fueled the purchase of public utility stocks, and drove up their prices. Public utilities, utility holding companies, and investment trusts were all highly levered using large amounts of debt and preferred stock. These factors seem to have set the stage for the triggering event. This sector was vulnerable to the arrival of bad news regarding utility regulation. In October 1929, the bad news arrived and utility stocks fell dramatically. After the utilities decreased in price, margin buyers had to sell and there was then panic selling of all stocks.
There are three topics that require expansion. First, there is the setting of the climate concerning speculation that may have led to the possibility of relatively specific issues being able to trigger a general market decline. Second, there are investment trusts, utility holding companies, and margin buying that seem to have resulted in one sector being very over-levered and overvalued. Third, there are the public utility stocks that appear to be the best candidate as the actual trigger of the crash.
My conclusion is that the margin buying was a likely factor in causing stock prices to go up, but there is no reason to conclude that margin buying triggered the October crash. Once the selling rush began, however, the calling of margin loans probably exacerbated the price declines. (A calling of margin loans requires the stock buyer to contribute more cash to the broker or the broker sells the stock to get the cash.)
For simplicity, this discussion has assumed the trust held all the holding company stock. The effects shown would be reduced if the trust held only a fraction of the stock. However, this discussion has also assumed that no debt or margin was used to finance the investment. Assume the individual investors invested only $162.50 of their money and borrowed $162.50 to buy the investment trust stock costing $325. If the utility stock went down from $162.50 to $50 and the trust still sold at a 100% premium, the trust would sell at $100 and the investors would have lost 100% of their investment since the investors owe $162.50. The vulnerability of the margin investor buying a trust stock that has invested in a utility is obvious.
The 1920s saw great strides in production techniques, especially in industries like automobiles. The production line enabled economies of scale and great increases in production. However, the demand for buying expensive cars and consumer goods were struggling to keep up. Therefore, towards the end of the 1920s, many firms were struggling to sell all their production. This caused some of the disappointing profit results which precipitated falls in share prices.
Consumerism can be thought of as the culture surrounding the buying and selling of products. Consumerism came into its own throughout the 1920s as a result of mass production, new products on the market, and improved advertising techniques. With more leisure time available and money to spend, Americans were eager to own the latest items. Advertisers used this to their advantage, often stressing luxury and convenience. Through mediums like radio and print advertisements, consumer culture was more visible than ever before.
Sears, Roebuck & Co., a company founded in 1893, regularly issued a mail-order catalog. By the 1920s, the catalog, nicknamed the consumer's bible, had become enormously popular. It completely revolutionized how people purchased items. The catalog contained literally hundreds of pages featuring products like sewing machines, bicycles, clothing, radios, and just about everything else imaginable. Installment buying, or buying on credit, was also popular, allowing families to purchase large items like automobiles or refrigerators and pay them off gradually over a period of time. Large department stores also became popular during this time.
With money to invest, many Americans began buying stock. This was the thing to do in the 1920s. It was seen as modern: a venture for those who were smart, sophisticated, and urbane. And while it carried risks, it was generally seen as a sound investment. As the economy continued to grow throughout the decade, some people came to see investing in stock as a foolproof way to get rich quick.
In 1928 the stock market was booming, and buying on margin became commonplace. Buying on margin was a risky practice in which the buyer would typically borrow money from their broker in order to pay for the stock. For example, a buyer might put down 20% of the cost of stock, but borrow the other 80% from a broker. Although there were subtle signs that the stock market could not continue to soar indefinitely, many people ignored these signs and continued with their risky, speculative stock market strategies.
Let's review. Following the end of the First World War, an economic shift took place as America's industrial might was unleashed for peacetime production. By the early 1920s, the economy was booming. Advances in technology, mass production, and new advertising methods led to a vibrant consumer culture. Advertising came into its own throughout the 1920s. Installment buying, or buying on credit, allowed Americans to purchase expensive items like automobiles and refrigerators. The Sears, Roebuck & Co. mail-order catalog revolutionized how people purchased.
President Calvin Coolidge's fiscally conservative policies ushered in the era of Coolidge Prosperity. Investing in the stock market became popular throughout the 1920s, and many Americans practiced the risky, speculative strategy of buying on margin, meaning they borrowed money from a broker to pay for their stock. On Black Tuesday, October 29, 1929, investors panicked and sold out their stock, leading to the stock market crash and, ultimately, the Great Depression.
Although farmers were losing ground throughout the 1920s, manufacturing rolled along at top speed. By 1929 stores and warehouses in America were bulging with goods. Between 1923 and 1929 worker output of manufactured goods increased by 32 percent. Assembly lines and new machinery boosted production. As manufacturers saw it, the more goods produced and sold, the more profit there was to be had. Homes in U.S. cities were being electrified, which created a market for new, timesaving electric appliances. Appeals to buy were everywhere. Advertisers touted their products, and movies teased Americans with images of movie stars living with luxuries all around. Although most Americans had little money left over after paying for necessities such as housing and food, they found a way to buy the new automobile, the electric washing machine, and the radio: It was called credit, or installment buying. A small first payment (down payment) was made; then the rest of the price was paid over time. This system worked well as long as the buyer had a job. Installment buying had never been used in America before the late 1920s. Previously, if the total cash price could not be paid up front, the purchase was not made.
Speculation in stock means to buy stock with the assumption that it can always be sold at a profit. Businesses needed to sell stock to raise money to expand. By the mid-1920s only 2 percent of Americans were purchasing stock. But as manufacturing continued to expand, stock prices climbed upward and investors made money. Word got around, and by the late 1920s nearly everyone who had a decent income saved to buy a share of stock. It appeared to be an especially safe way to make easy money. However, investors were not protected from misleading information about stocks. It was difficult for investors to know exactly what they were buying. Companies told the public that they were doing well, but the public had no means of confirming that the companies' financial reports were reliable. To make matters worse, a dangerous way of buying stock developed. It was called "buying on margin."
Buying on margin means that a person purchases a stock by using a bit of his or her own money and borrowing the rest. It is similar to buying on credit. For example, to purchase a $100 stock the buyer might put up $20 and borrow $80 to make up the entire price. Investors worked with investment brokers to borrow money and then buy a stock. Investment brokers got their loan money from banks; brokers and banks alike believed that the stock market was on a permanent upward climb. The brokers set a margin limit. In the example the margin limit was 20 percent, meaning that the investor had to keep 20 percent of his or her own cash invested in the stock. If the stock value increased to $130, then the investor paid back the $80 borrowed and was left with the $20 originally invested and $30 profit. All $50 could be reinvested in a similar manner. The $30 profit represented a 150 percent profit. Such large profits were common as the market continued to rise. Investors, using their increasing profits and borrowed money, continued to buy stocks. This growing demand for stocks pushed stock prices up until they were dramatically higher than the stocks' real worth based on the particular company's profits and overall worth. When stock prices are steadily rising, the market is called a "bull" market. When the market steadily drops, it is a "bear" market. The market in mid-1929 was a raging "bull" market. 781b155fdc