The 1920s were a time of great financial prosperity. In the early 1920s, real estate was booming, causing many people to jump on the real estate bandwagon that promised riches for everyone. Not only that, but the stock market was rising to levels never seen before and it caused a buying frenzy that everyone wanted to get into. It was a period of speculation and investment so intense that it has been called the boom 20s.
If you had invested in real estate or the stock market in the early 1920s and got out of it in the mid-1920s, you would have made a lot of money and been well off, but like in any boom, people thought that the stock market was going to go up forever, but as we all know, nothing ever happens, and the faster something goes up, the faster it will go down, but no one could have ever predicted the crash of 1929. was so sudden and severe that it took many people by surprise and left much of the investor population bankrupt. Let’s analyze why this happened.
One of the biggest problems during the stock market boom was that brokers were so confident that stocks would continue to rise that they allowed investors to buy stocks on margin. This meant that brokers now allowed investors to borrow on top of their initial investment to buy even more shares.
For example, if I have $1,000 and wanted to buy $1,500 worth of stock, the broker would have loaned me $500 on top of my original thousand dollars to reinvest in that stock. In the 1920s, brokers allowed their investors to borrow on average up to 66% on margin, and this was an unprecedented amount of margin the market had ever seen. It was a very dangerous way to invest. When the stock market crash of 1929 happened in the space of three days.
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 go broke, but they owed money that they didn’t. could hope to repay. The situation had become so serious that many male investors had committed suicide to prevent themselves from paying back the money they all had and also to protect their families. After the crash, the New York Stock Exchange then put in place rules to limit the amount a broker can lend to an investor on margin.
Another reason the stock market crash was so sudden in 1929 was because short sellers were allowed to short any stock, no matter how hard the decline was. Shorting the stock means that you sell a stock in the hope that that stock goes down, and when it goes down, you can buy that stock and pocket the difference. Short sellers smell blood when they saw the market crash and they behaved like bandits, but the effect they had on the stock market is that they drove stock prices down Individuals so fast and so hard that investors have done so have no opportunity to sell their shares to exit the market, because market makers know that the shares will fall and refuse to execute buy orders in them . The New York Stock Exchange is also ensuring this will never happen again by implementing the bullish rule. The Rise Rule basically means that you cannot short a stock until there is a green rise in its price, which means the stock must rise before you can sell it short .
The stock markets learned a big lesson from the stock market crash of 1929 and it saved them time and time again. For example, the stock market crash of 1987 was a good sized percentage decline, but it was a far cry from the stock market crash of 1929 and one of the reasons markets rallied very quickly in 1987 was the bullish rule. Short sellers can no longer make easy money in the panic and dismay of their fellow investors.
Comments are closed.