The collapse of the Long Bull Market led to debt and ruin for millions of Americans and contributed to the period known in US history known as the Great Depression.
What is the Stock Market? The Stock Market was established as a system for selling and buying the shares of companies.
What is a Bull Market? A Bull Market is a long period of rising stock prices.
Where was the Long Bull Market? The Long Bull Market and the potential profits encouraged people to invest in stock leading to heavy speculation on the Stock Exchange.
Long Bull Market - "Buying On Margin": Buying stocks "on margin" essentially meant buying stocks with loaned money.
Facts about Long Bull Market
1920s Economic Boom: The 1920s Economic Boom saw increases in sales, productivity and wages. There was a rising demand for new consumer products leading to massive profits for businesses and corporations. This encouraged growth and led to the economic boom and the rise in stock market investments and the rise of Consumerism and easy credit in America.
Prosperity: Personal taxes and corporation taxes had been significantly reduced thanks to the Mellon Plan. It was a period of great prosperity for many Americans - and they believed it would never end.
Consumerism and Easy Credit: Consumerism increased in America during the Roaring Twenties as a result of technical advances and innovative inventions and ideas in the areas of manufacturing communication and transportation. Americans moved from the traditional avoidance of debt to the concept by buying goods on credit installments. Americans who were once "thrifty and prudent" adopted the philosophy of "Live now, pay later".
Gambling on the Stock Market: Ordinary Americans started to gamble on the Stock Market in the 1920s hoping to make a fortune overnight. It was made easy due to the system of 'Buying on Margin'. Buying stocks "on margin" essentially meant buying stocks with loaned money.
Margin Definition: A margin is the deposit of an amount of money to given to a broker as security for a transaction. Buying on margin was not regulated in the 1920's, so the brokers could choose the margins they were willing to give.
Speculation: In the 1920's speculating on the stock market seemed a 'safe bet' - a foolproof way to get rich quick. Stock prices kept rising in the 1920s and the stock market soared. People didn't care what companies they were investing in or whether the company had good future prospects - they were betting that the stock market would continue to rise.
Stock Prices: Stock prices steadily increased in the 1920s as millions of new investors bid the prices of stock up without taking into account a companies profits, its earnings or it future potential.
"Buying On Margin": A buyer would typically borrow money from their broker in order to pay for the stock. For example, a buyer might put down 10% of the cost of stock, but borrow the other 90% from the broker.
Example: An example of Buying on Margin is as follows:
Profit: The way people made money was as follows:
Loss: The system was great as long as stock prices were rising - the problem came when stock prices began to fall. Buying stocks was a gamble - speculation that investment in stocks would lead to gain but many ignored the risk of loss.
Margin Debt: Ordinary Americans made their use of stock market leverage through margin debt in order to make an investment in the Stock market. Margin debt carried an interest rate, and the amount of margin debt changed daily as the value of the underlying securities changed. Margin debt allowed investors to make investments with their brokers' money.
A Margin Call: The problem came if the price of stock fell and the 'Margin Call' came into effect.
1929 Market Prices: The prolonged Bull Market of the 1920's saw stock prices rocket from an average of $50 per share in 1922 climbing to a massive $350 per share in 1929. Stock prices began to rise sharply in 1926 - 1927. The high point for the 1929 market was August 1929 at $350.
Buy, Buy, Buy: It is not surprising that the prolonged Bull Market of the 1920's saw more investors wishing to buy stocks than were willing to sell, which led to the continuing rise in share prices as investors competed to obtain available equity.
Investors: By 1929 about 10% of US households, between 3 to 4 million Americans, had invested in the stock market. Banks had also invested depositor's money into the stock market.
The End of the Bull Market: By the summer of 1929 the stock market was running out of new investors. The Bull Market only lasted as long as investors were putting new money into it.
Sell, Sell, Sell: By September 1929 experienced, professional investors realized that the economy was contracting and the risk in the 1929 market. They began to sell off their stocks and share prices began to slowly fall. Other smaller investors, worried about paying off their loans, also started to sell and stock prices fell further. So started the selling spiral.
Large-scale Margin Calls: On Monday, October 21, 1929 stockbrokers began to make large-scale margin calls and panic started to set in.
Black Thursday: On October 24, 1929, nicknamed Black Thursday, a record 12,894,650 shares were traded on the Stock Market.
Fight-Back Friday: Leading bankers and Investment companies desperately tried to stabilize the market by buying up blocks of stock, that produced a moderate rally on Friday October 25, 1929 .
Free Fall: Their attempts failed and on Monday, October 28, 1929 the stock market went into free fall.
Black Tuesday and the Great Crash: On Tuesday, October 29, 1929 stock prices completely collapsed. 16,410,030 shares were traded on the New York Stock Exchange (NYSE) in a single day and between $10-$15 billion had been lost due to the plummeting share prices. Margin buyers had to sell and there was then panic-selling of all stocks.
Bull Market to Bear Market: The Long Bull Market was replaced by a Bear Market. More people were looking to sell than buy and, as a result, share prices continued to drop during the Wall Street panic. By mid-November, 1929 a staggering $30 billion had been lost on the stock market and theories of the Boom and Bust Cycle were proved.
The Great Depression: The collapse of the Long Bull Market contributed to the devastating period in American history known as the Great Depression.
|US American History|
|1929-1945: Depression & WW2|