The overall scenario of the stock market the world over doesn't present happy tidings. The prevalent economic crisis in Europe and other parts of the world are sufficient to revive the memories of nearly decade long depression after the dreaded crash of the stock market in 1929. The securities boom of 'Twenties' got virtually wiped out.
The Stock Market Boomof Twenties
The overall strong economic growth pumped new energy in all the key sectors of development. The securities bazaar of the 1920s recognized the welcome change in the economy and started climbing new heights like a young lad each day. It filled the mood of the citizens with exuberance and the stock market seemed a good option for investment. The people began investing to make good their gains. The rush added fuel to the stock prices and the market prepared itself for the bull-run. This bull-run became noticeable first in 1925, followed by a strong upward trend in 1927. Every where people were talking about stocks and the opportunities to invest looked aplenty. Inevitably by 1928, a stock market boom flowered.
Availability of Margin Money
The decade of 'Twenties' also introduced a new instrument called Margin Money. It simply meant that people could buy stocks with 10 to 20% of their money and could borrow 80 to 90% of the cost of the stock from the broker.
The provision of Margin money lured more and more people to trading securities. By early 1929, people were scrambling to get into the stock market as no one wanted to leave their possible gains on the table. The profits seemed so assured that no one wished to look else where.
And yes, eachbrokerage allowed customers to speculate on borrowed money.
Early Signs of Trouble
The early signs of trouble appeared on March 25, 1929. That day, the securities headed south followed by a mini-crash. A string of margin calls were issued when prices began to drop in the panic struck stock market. It was a prelude of what was to come.
In the following few months, it became apparent that the economy might be headed for a serious setback. The economic pointers were not looking good for the first time. Steel production had gone down, cement production faltered as house construction slowed and other commodities were loosing their race to reach up to people.
At this time, a few wise economists warned the people of an impending major crash. However, their calls fell on deaf ears as people refused to heed out of their greed.
The Hammering of the Stock Market
On Thursday, October 24 1929, panic selling occurred as nervous investors began selling their stocks. Somehow many had realized that the stock boom had been an over inflated bubble. The best course open to them was to sell their stock with out delay at any price.
Margin investors were the first soft targets. Millionaire margin investors were rendered bankrupt as the stock market kept on its blood-bath through out on October 28th and 29th of 1929. It did not spare any margin player. Most of the investors had lost their life savings in some form. Many business houses and banks collapsed.
By November of 1929, the Dow Jones had lost almost 250 points, i.e. it sank from nearly 400 points to 145 points. In three days, over five billion dollars worth of share value was lost by the New York Stock Exchange! By a rough estimate, 16 billion dollars worth of stock capitalization vanished in the thin air by the end of the 1929 stock market crash!
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