Stock Market Crash Lucian Pop Travis Smith
The Causes of the 1929 Stock Market Crashed • The dust-bowl • Stocks were over-priced • Massive fraud and illegal activity • Margin buying • The Federal Reserve Policy
Dust Bowl The Grapes of Wrath accurately describes conditions during the dust bowl for many families in the 1920’s. The dust bowl ruined farmers crops for years giving them nothing to eat and no money to pay the bank with. This caused runs on the bank.
Run on the bank! • Banks have only 5%-10% of their total deposits in cash, the rest of the money is loaned out. People were not able to pay off their loans on modernized equipment so people knew banks were in trouble. People then made a “run on the bank” and demanded their money when the bank had loaned it out.
Over Priced Stocks • During the late 1920’s stocks had gone up a tremendous amount, so much so that they were over-priced. • Many people believe that the 1929 crash brought the prices of stocks back to there normal level.
PE Ratios The PE ratio also known as the price-to-earnings ratio, is a ratio that compares price to earnings telling you basically how much time it will take for the company to earn the money that its currently trading for.
Insider Trading/Fraud Having privileged knowledge of future stock activity. Over-inflating stock prices to make your company look more attractive to investors. When earnings are released the stock falls drastically and many investors loose a great deal of money.
Margin Buying • Margin buying is borrowing money against the value of your stocks. Usually the money you borrow is reinvested in stocks. You pay a 4% interest rate but expect a 10% return on your stocks. • When your stock goes down you loose money plus the interest paid on it and often have to sell stocks at a bad time.
Margins If a margin call comes in that means that you owe on the money you lost from trading on the margin and you then must sell your stocks for a loss. When the market is down you usually just wait it out, but if a margin call comes in it forces you to sell stocks at a bad time and you loose large amounts of money or can go bankrupt. In the years leading up to the 1929 crash, the stock market went up everyday and margin buying was a good idea but there is always a risk of a crash and loosing everything to make an extra 6%.
Federal Reserve • Created in 1913 • Federal Deposit Insurance Corporation was created in 1933, in order to bring confidence back into the banking system. It insures deposits up to $100,000 so a run on the bank will no longer occur.
National Debt • The national debt is how much money our country has issued compared to how much gold we have. We don’t actually owe money to other countries. The federal reserved issued to much paper money and didn’t have the gold to back it. People then wanted cash and not just money in the bank.