Market Speculation

1. Market Speculation Too Great A Risk?

2. The American Dream • Goal: Achieve permanent prosperity • Belief: Everyone can be rich by investing money in the stock market • Result: Thousands poured savings into the market • Downfall: They wanted to make their fortune immediately

3. Speculation • Buying stocks they thought would quickly rise in price • After stock price rises, sell for a quick profit • Very profitable venture b/n 1927-29 • See Chart pg 419 • Very attractive gamble

4. Buying on the Margin • Common practice • Perks • To buy $500 worth of stock, you didn’t need $500 up front • Down payment of as little as 5% ($25 in our example) • Borrowed the rest from a stockbroker (loan) • With $500, you could buy $10,000 worth of stock • Stock rises, Sell, Pay broker back, Make a profit

5. Buying on the Margin • Risks • Stockbroker can make investor pay off loan at anytime • If investor could not pay, broker keeps the stock (collateral)

6. Saturation of the Market • 1929: $6 billion in margin loans • Brokers called in investors • Investors could not pay, so they sold their stocks • What happens to the market? • Other investors see the downturn of the market, panic, and sell their stocks • Domino effect: by October 29, 1929 the bottom fell out of the market

7. Great Depression Begins • Millionaires were in debt • Banks lost their reserve money as debtors could not repay loans • Money invested in a savings account at a bank vanished to pay off bank notes • Banks were not federally insured • Millions of innocent Americans lost all their savings