In the 1920s, the stock market wasn't just for the elite; it was a national pastime. To make entry easier, brokers offered "margin loans." Here is how the math worked:
The Great Depression taught a brutal lesson about the dangers of unregulated leverage. In the aftermath, the U.S. government passed the , giving the Federal Reserve the power to set margin requirements. Today, investors generally must put down at least 50% of a stock's price, a far cry from the 10% "easy money" of the 1920s. buying on margin great depression
The mechanics of margin buying turned a market correction into a total collapse. As people were forced to sell to cover their loans, the massive volume of sell orders drove prices down further. This triggered a second wave of margin calls for other investors, who then had to sell, driving prices down even lower. In the 1920s, the stock market wasn't just
A buyer could purchase a stock by putting down only of the total price in cash. The broker would cover the remaining 80% to 90%, charging interest on the loan. For example, if you wanted $1,000 worth of stock in a booming radio company, you only needed $100 of your own money. government passed the , giving the Federal Reserve
The Illusion of Infinite Wealth: Buying on Margin and the Great Depression
The tragedy of buying on margin was that it didn't just ruin the speculators; it broke the banking system.