Stock market crash Flashcards
Why did stock prices go really high in the 1920’s?
New people were coming into the stock market because they could buy on margin, more demand resulted in higher prices
What does buying on margin mean?
buying stocks using credit, typically people would pay 10% and borrow the rest
Why does buying on margin cause stock prices to go up?
It meant more people could buy stocks. More demand results in higher prices
Why did prices first start to drop?
Serious investors realized prices had become to high and started to sell.
What causes stock prices to go up?
Lots of people buying and few selling (high demand, low supply)
What causes stock prices to go down?
Few people buying and lot of people selling (low demand, high supply)
When stock prices first started to drop, what did that cause?
margin calls
What are margin calls?
When people who had bought stocks on margin are told they either have to come up with more money or sell their stock because the price is dropping
What did margin calls cause?
Prices to drop more
How did margin calls create a mini stock market vicious circle?
Margin calls resulted in prices dropping, prices dropping caused more margin calls, which caused prices to drop more, and this cycle just kept repeating
As margin calls caused stock prices to drop, what did this cause many people who had not bought on margin to do?
panic and try to sell all their stocks
When the stock market is crashing, what is happening in terms of supply?
Supply is very high because everyone is selling
When the stock market is crashing, what is happening in terms of demand?
Demand is very low because no one is buying
What are 2 ways the stock market crash contributes to people cutting back on spending?
- some people lost a lot of money in the crash and don’t have as much to spend
- people start to worry about the economy when they hear about the crash, so they think they should save their money
