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The Great Depression taught a brutal lesson about the dangers of unregulated leverage. In the aftermath, the U.S. government passed the , giving the Federal Reserve the power to set margin requirements. Today, investors generally must put down at least 50% of a stock's price, a far cry from the 10% "easy money" of the 1920s.
People weren't buying stocks because the companies were profitable; they were buying because they expected the price to go up tomorrow. This is the definition of a speculative bubble. As long as prices climbed, the system held. But margin buying has a "trap door" called the The Trap Door: The Margin Call buying on margin great depression
A margin call occurs when the value of a stock drops below a certain point. To protect their loan, the broker demands that the investor immediately deposit more cash or sell the stock to cover the debt. The Great Depression taught a brutal lesson about
If the stock price doubled to $2,000, you could sell it, pay back the $900 loan, and walk away with $1,100—nearly a on your initial $100 investment. This "leverage" turned modest savings into overnight fortunes, creating a feedback loop where rising prices attracted more margin buyers, pushing prices even higher. The Rise of the Speculative Bubble Today, investors generally must put down at least
By 1929, an estimated was out on loan to stock speculators—more than the total amount of currency circulating in the United States at the time. This massive influx of borrowed money disconnected stock prices from the actual value of the companies.
The mechanics of margin buying turned a market correction into a total collapse. As people were forced to sell to cover their loans, the massive volume of sell orders drove prices down further. This triggered a second wave of margin calls for other investors, who then had to sell, driving prices down even lower.
