Stock Market Crash of 1929
The 1920’s were a time of great prosperity. After World War I, the “Roaring Twenties” was fueled by inventions of the radio and automobile. Industrialization and new technologies benefited the economy greatly from the new life changes such as wide spread air travel.
As the Dow Jones Industrial Average soared, many investors bought shares up at a fast pace. Stocks were seen as extremely safe by most savy in finance and the economy, due to the growth in the economy. Margin became available to investors. Margin is leveragin your current holdings to purchase more stocks. For every dollar an investor had, they could margin and borrow 1 to 9 dollars worth of stock. Because of this leverage, if a stock went up the investor would see exponential gains. Unfortunately they would also see exponential losses. If a stock drops to much it could wipe out all an investor had and then some, sometimes leaving them oweing money to there brokerage.
From 1921 to 1929, the Dow Jones rose from 60 to 400. Investors welcomed this creation of wealth that occured over night. Stock market trading became gambling with investors mortgaging there homes, and investing there life savings with big names such as Ford, and GE. To most investors, stocks were a sure thing they never went down. Not many investors studied the earnings and took the time to research the companies they invested in. Many fradulent companines were created that fooled investors in to investing there money in to a company that didn't even exsist. Most investors were blinded by there dreams of wealth, and to them the market going down or worse yet crashing wasn't even an option considered.
By 1929, the Fed had chose to raise interest rates several times to slow down the overvalued stock market. By October, the realization of a market downturn materialized. On Thursday, October 24 1929, investors paniced, selling occurred as investors realized the stock boom had over inflated the market. Margin investors were losing everything as every investor tried to liquidate. Millionaires trading on margin became bankrupt in moments, as the stock market crashed. By the time November of 1929 came, the Dow Jones had fallen from 400 to 145. In a quick three days, the New York Stock Exchange had erased wealth in the amount of more than 5 billion dollars.
Banks had invested their deposits in the stock market. Now that stocks had substantial losses, the banks had lost the money, they were holding. People lined up at the bank where they tried to withdraw all their savings. The biggest banks and brokerage houses became insolvent, causing the market to continue to crash. The financial system was in a state of chaos. Even bank customers who had never invested in the stock market became broke as over $140 billion of money disappeared and over 10,000 banks failed.
The stock market crash of 1929 brought on the Great Depression. The Depression lasted from October 1929 to the mid 1930’s. Poverty occurred, as many workers lost their jobs and the standard of living decreased. It was estimated that one third of Americans were below the poverty line enduring the Great Depression. The Dow Jones finally reached its 1929 levels in 1955 this was 26 years later.
The stock market crash of 1929 was just like all of the other financial crisis in history, it was brought on by irrational expectations and was followed through with mass histeria. Learning to identify when and how, these patterns occur in the market will allow you to make money when the market is falling or rising.