By Bob Randooke
The 1920s were a time of great financial prosperity. During the early part of the 1920s real estate is booming causing many people to get into the real estate bandwagon that was promising riches for everyone. Not only that but the stock market was going up to levels never seen before and this caused a frenzy of buying that everyone wanted to get into. It was such a high time of great speculation and investment that it was called the booming 20s.
If you had invested in real estate or the stock markets in the early part of the 1920s and got out by the middle of the 1920s you would’ve made a lot of money and been well off, but as with any boom people thought that the stock market was going to go up forever, but as we all well know nothing ever does, and the faster something goes up the quicker it will go down, but nobody could have ever predicted the crash of 1929. It was so sudden and so severe that it caught many people by surprise and left a large part of the investor population in bankruptcy. Let us analyze why this happened.`
One of the biggest problems during the boom time of the stock market is that brokers were so confident that stocks were going to keep going up that they were allowing investors to buy stock on margin. This meant that brokers were now allowing investors to borrow on top of their original investment to buy even more stock.
For example if I have $1000 and I wanted to buy $1500 of stock might broker would have lent me $500 on top of my original thousand dollars to reinvest into that stock. Brokers in the 1920s were allowing their investors to borrow on average of up to 66% on margin , and this was an unprecedented amount of margin that the market ever experienced. This was a very dangerous way to invest. When the stock market crash of 1929 happened within a three-day span.
Investors not only lost 100% of their investment but also the margin call on top of that, which meant that not only did many investors become broke, but on top of that they owed money which they could not hope to pay back. It had gotten so bad that many of the male investors had committed suicide to prevent themselves from paying back the money they all and also protecting their families. After the crash the New York Stock Exchange then implemented rules to limit the amount that a broker can lend to an investor on margin.
Another reason that the stock market crash so suddenly in 1929 is that short sellers were allowed to do short any stock no matter how hard it was going down. Shorting the stock means that you are selling a stock in the hopes that that stock will go down, and when it does go down you can buy that stock and pocket the difference. The short sellers smell blood when they saw that the market was crashing and they made out like bandits, but the effect that they had on the stock market is that they caused the prices of individual stocks to go down so fast and so hard that investors did not have a chance to sell their stock to get out of the market, because the market makers know that the stocks were going to go down and refuse to execute there buy orders. The New York Stock Exchange also make sure that this would never happen again by implementing the uptick rule. The uptick rule is essentially means that you cannot short a stock until there is a green uptick in its price, which means the stock has to go up before you can short it.
The market exchanges learned a a big lesson from the 1929 stock market crash and it saved them many times. For example the stock market crash of 1987 was a good size percentage drop but it was nowhere near the 1929 stock market crash and one of the reasons that the markets recovered very quickly in 1987 is the uptick rule. Short sellers can no longer make an easy buck from the panic and distraught of their fellow investors.
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