“Black Tuesday” The “Roaring 20s” Come to a Crashing End

How the Stock Market Works Share: a portion of ownership of company (more shares=more ownership). It entitles you to a portion of the company’s profits (dividends) Stock Market: The place where shares are bought and sold How do you make money: a) profit dividends b) sale of shares (buy low – sell high)

Why stock prices go up and down: Demand – if demand is high, then the price goes up -- if demand is low, then the price goes down People want exciting/profitable stocks, but the supply is limited. What sets a share price: -Initially, a share should represent a portion of the companies assets. -After it is first sold, the share price is then dictated by demand for it on the stock market.

Buying on Margin This is when you buy stocks on credit An investor puts down 10% of the share price, promising to pay the other 90% later If the stock goes up, it is sold, the broker/bank gets its 90% and the rest is profit for the investor If the stock goes down, the investor is still responsible to pay off the debt

Causes of the “Crash” 1.Economic slowdown: -the huge manufacturing boom of the 20’s created an oversupply of goods (cars, washing machines, houses, etc.) Supply was high -People either already had these goods, or could not afford to buy any more. Demand was low -Company profits fell, making the stocks worth less

2.Overconfidence: -people believed that stocks would only go up -there was an absolute optimism and faith in the capitalist system -the “experts” kept repeating that times would only get better

3.Overpriced Stocks: -stock prices were out of proportion to what a company was actually worth -companies like Canadian Marconi were valued at $130,000,000 in stocks while they were actually only worth $5,000,000. (stocks vs. assets) -the high demand for stocks, ANY stocks, kept pushing prices higher and higher

4.Buying on margin: -because investors could buy stocks on credit, they invested beyond their means -this created an artificial demand that drove stock prices up, based on sales that weren’t paid for yet. -due to all of the stocks bought with “borrowed money”, the entire system was unstable

5.Fear: -once prices began to drop, people were afraid that they would lose money. -the fear was especially strong in all those who had bought on margin -investors worried that the stock price would fall below what they paid and they wouldn’t be able to repay the loan

-people sold their stocks as quickly as possible, hoping to at least make back their money (supply was high) -Almost no one wanted to buy the stocks as they were going down (demand was low) -The more the prices dropped, the more terrified people became and they sold their stocks for whatever price they could, no matter how low.

The Result: Black Tuesday Oct 4, 1929 The massive sell off of stocks caused prices to drop and people lost massive amounts of money. On top of the losses in stock, many who had bought on margin now did not have the cash to pay back their loans Canadian companies lost 50% of their value overnight Many people, companies and banks went bankrupt due to unpaid loans

Suddenly, people who were millionaires on paper, were now penniless Companies that had borrowed money to buy stocks or expand, now had very little money to pay their debts; this lead to lay-offs and closures—boosting unemployment Investors who bought “on margin” could not pay their debts to brokers/banks Many banks did not have the money to pay back their customers (banks had lent customer money to investors)=bank closures Even those who had not invested lost their money as banks closed and could not return customers’ life savings