Will History Repeat Itself? Examining the Stock Market Crash of 1929 and Economic Indicators of 2013
The end of World War 1 brought a new era into the United States; an era of enthusiasm, optimism, and confidence. This was a time when the industrial revolution was in full swing and new inventions, such as radio and airplanes, made anything seem possible. Capitalism was the economic model and nothing but good times seemed to appear on the horizon. It was this new era of optimism that enticed so many to take their savings and invest in various businesses and stock offering. And in the 1920s, the stock market was a promising favorite.
The Biggest Stock Market Boom in History
Even though the stock market is known for volatility, it didn’t appear so risky in the 1920s. The economy was thriving, and the stock market seemed like a logical investment strategy.
Wall Street quickly attracted a lot of investors. As more people invested, stock prices began to rise. The sudden spike in price first became noticeable in 1925. And then between 1925 and 1926, stock prices started to fluctuate. 1927 brought a strong upward trend, or bull market, which enticed even more people to invest. By 1928, the market was booming.
This booming market completely changed the way investors perceived the stock market. No longer were stocks viewed as long term investments, rather a quick way to become rich. Stock market investing had become the talk of the town, from barber shops to parties. Stock market success stories could be heard everywhere, newspapers and other forms of media reported stories of ordinary people – like teachers, construction workers, and maids, quickly getting rich quick off the market. Naturally this fueled the desire among the general population to invest.
Many newcomers wanted in, but not everyone had the money. This in turn led to what is known as buying on margin. Buying on margin meant that a buyer could put down some of their own money, and borrow the rest from a broker/dealer. In the 1920s, a buyer could invest 10-20% of their own money and borrow the remaining 80-90% to cover the stock price.
Now, buying on margin could be a risky endeavor. If the stock price dropped below a certain amount, the broker/dealer would issue a margin call. This meant the investor needed to come up with cash to repay the loan immediately, which often meant selling the underperforming stock.
In the 1920s, many people were buying stocks on margin. They seemed confident in the booming bear market, but many of these speculators neglected to objectively evaluate the risk they were taking and the probability that they might eventually be required to come up with cash to cover the loan to cover a call
The Calm before the Financial Storm
By early 1929, people across the country were rushing to get their money into the market. The profits and road to wealth seemed almost guaranteed and so many individual investors were putting thei r ai 投資平台 money into various companies stock offering. Sham companies were also set up with little federal or state oversight. What’s worse – even some unscrupulous bankers were using their customers’ money to buy stocks – and without their knowledge or consent!
While the market was climbing, everything seemed fine. When the great crash hit in October, many investors were in for a rude awakening. But most people never noticed the warning signs. How could they? The market always looks best before a fall.