Playing the Stock Market Stock markets played a big part in the economic boom of the 1920s. Let's take a moment to examine how stock markets work. What Is a Stock Market? If you wanted to start up a business, you would need to spend money. You might use your own, or get a business loan from the bank. Or, you could find partners and offer them a share in your profits in exchange for investing their money in your business. Companies that need a lot of money can sell shares in their business on the stock market. They make ordinary people their business partners. Each share gives the owner a piece of the business. Shareholders are entitled to attend the company's annual general meeting and to vote to select top executives. People buy shares (also called stocks) for two different reasons. 1. They hope that the success of the business will cause the value of each share to rise. Then they can sell the stocks for a profit. 2. if the company is doing well, shareholders may receive a portion of the company's profits. This payment is called a dividend. Of course, there are risks involved in buying stocks. if the company does poorly, no dividends are paid. The value of the shares will probably fall too. Did You Know?
The idea of holding shares in a business dates back centuries, to a time when business owners in private clubs bought and ; sold portions of one another's companies. The Stock Market Boom About one Canadian in ten invested in stocks during the 1920s. Charlotte (Lottie) Nugent was one of them. Lottie was a bookkeeper at Monarch Brass in Toronto. Like most young women of the time, she hoped to marry someday and leave Monarch Brass to raise a family. By the late 1920s, Lottie had become the head bookkeeper at the firm. Over the years she had carefully saved up $3000. Lottie had a boyfriend too - a young stockbroker from a good Toronto brokerage firm. Stockbrokers advise clients who want to invest in stocks. He confidently advised her to invest in the booming Toronto Stock Exchange. Lottie trusted his judgment, and used all her savings to buy on margin - that is, she borrowed money from her boyfriend's firm to pay for her shares, and paid only a small percentage of cash up front. Lottie's boyfriend assured her that she could easily pay off the loan - and still make a profit - as the stocks went up in value and paid dividends. Stock prices had been climbing since the mid-1920s and everyone said that the boom would continue.
Number of Shares Sold on the New York Stock Exchange, 1920-1929 (in millions). The New York Stock Exchange was so large that other markets usually followed whatever pattern it set. In what year did the stock market boom begin to accelerate? NYSE Stocks Year: 1920
Number of Shares: 227
Number of Shares: 173
Number of Shares: 259
Number of Shares: 236
Number of Shares: 282
Number of Shares: 454
Number of Shares: 451
Number of Shares: 577
Number of Shares: 920
Number of Shares: 1125 Questions 1 1. Why do some companies offer shares on the stock market? Give two reasons why investors buy these shares. 2. Describe a business that you might like to start up someday. Explain how you would get enough money to set up the business. 3. In your own words, explain the term "buying on margin." What financial benefits did this purchase plan offer? What problems do you think could arise from this practice? Use examples to explain your ideas. Black Tuesday
Here is a video about the stock market crash in the US. Like today, the US was the leading economy of the time (most business and money) and the effect of the crash there was felt throughout the world. The conditions leading up to this crash were very similar in Canada...worth a watch... All through September of 1929, Lottie Nugent watched nervously as the stock market fell. Her boyfriend kept telling her to hang on. He was sure the stock market would soon head up again. "It always does," was his simple advice. But he was wrong. Experienced investors had recognized that prices had gone as high as they were going to go, and that this was a smart time to sell. Many put large blocks of shares on the market. All these sell orders caused share prices to slip gradually downward. In October, things slipped even further. Financial experts urged investors not to panic, but some did. Soon there were many more people looking to sell their shares than there were people interested in buying them. Finally, on October 29, Black Tuesday, share prices nose-dived. Desperate traders sold their shares for whatever they could get. Lottie's last hope of making any profit was lost. Days later the news was even worse. Her boyfriend's brokerage company was bankrupt. It needed to close out her account to pay off debts of its own. She was given just six days to come up with the $4421.27 still owing on shares she had bought on margin. That was as much as Lottie could earn in five years' work at Monarch Brass. Like many people, Lottie lost it all in the Great Crash. She could see no way out. Her plans for the future were in ruins. Lottie quietly went home and took her own life. This is a true story. The same scenes were played out in other countries in North America and Europe. On "Black Tuesday," stock markets collapsed in New York, Toronto, Montreal, and around the world. Within a month, a typical share price of $10 was down to less than $5. By mid-1932, the same share was worth $1.50 or less. Some cases were more extreme; for example, Massey-Harris farm machinery shares fell from a high of $99.50 down to just $2.50 during this time. As an aside, Massey-Harris, whose products were sold world-wide, was based in Brantford. It wasn't just investors who lost out. As shares lost value, companies had less money available. Most cut back on production or closed altogether. Soon, about one Canadian worker in four did not have a job, and many others were facing wage cuts. Since people had less money to spend, stores had to cut their prices and staff. This downward spiral quickly dragged entire communities along with it. The next 10 years became known as the Great Depression. Did You Know? Among those who lost heavily in 1929 was a prominent Quebec lawyer named Louis St. Laurent. Nineteen years later, when he became prime minister, he had just finished paying off these debts. Questions 2 1. How were each of the following affected by the Crash? a) stock investors
d) store owners 2. Massey-Harris lost huge amounts of share price. This is almost always devastating for a business. Do you have any idea what the effect on Brantford might have been? Causes of the Crash In a sense, the Crash was predictable. As the Human Fly found out, what goes up must come down - and the same holds true for the economy over time. The economy had been riding so high for so long that it was bound to face a downturn at some point. But what caused such a sudden and severe crash? The stock market collapsed because of some serious weaknesses in the economy. Each problem was either a case of too much or not enough. There was too much margin buying, production of goods, and American economic influence. There were not enough wages for workers or protection for people's savings. Government did not do what it was meant to do, regulate the activities of large businesses who were profiting immensely. These six problems caused an imbalance that eventually toppled the entire world economy. The End of the Boom The collapse of stock markets around the world marked the end of an era. For many people, the prosperity and optimism of the 1920s became a fond memory in tough times. Canadians suffered because of the stock market crash. Many lost their savings, their jobs, their automobiles, and their homes. Some people, like Lottie Nugent, the trusting Toronto bookkeeper, lost even more. Questions 3 1. In many things, but especially in the world of investing, the phrase "if it seems too good to be true, it probably is" is often used. Thinking of this phrase, what would YOU have done if you had been an investor in the time just before the big crash? 2. Look at the five causes of the 1929 Crash. Choose two of them and explain ideas for changes you would make to prevent such a large crash from happening again.