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Define buying “on margin.” Why is it a risky practice?

Define buying “on margin.” Why is it a risky practice?

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Read the article and answer the questions: Define buying “on margin.” Why is it a risky practice?
Bad Timing To Raise Interest Rates In August 1929, the Fed took strong action. It raised interest rates. Interest rates are fees that are charged for borrowing money. Higher interest rates make loans more expensive. They also drive up costs for products and services. The interest rate hike came at a bad time. It was supposed to shrink the stock market by maybe 10 percent. Instead, the market eventually fell 90 percent. The problem? The U.S. economy was already starting to cool off. There had been the big boom. Now business was slowing down. Fewer new houses were being built. Factories had fewer orders for new products. The clues were there. However, the Fed didn't see them. The interest rate hike hit the U.S. economy hard. It was supposed to slow down the stock market. In fact, it helped crash it. It also slowed down the U.S. economy to a crawl. Banks failed and businesses closed. People lost their jobs and homes. Not even the wisest experts could see the Great Depression coming. Many things caused it. The stock market crash was just one of them. It would take a decade for the country to recover.
Transcribed Image Text:Bad Timing To Raise Interest Rates In August 1929, the Fed took strong action. It raised interest rates. Interest rates are fees that are charged for borrowing money. Higher interest rates make loans more expensive. They also drive up costs for products and services. The interest rate hike came at a bad time. It was supposed to shrink the stock market by maybe 10 percent. Instead, the market eventually fell 90 percent. The problem? The U.S. economy was already starting to cool off. There had been the big boom. Now business was slowing down. Fewer new houses were being built. Factories had fewer orders for new products. The clues were there. However, the Fed didn't see them. The interest rate hike hit the U.S. economy hard. It was supposed to slow down the stock market. In fact, it helped crash it. It also slowed down the U.S. economy to a crawl. Banks failed and businesses closed. People lost their jobs and homes. Not even the wisest experts could see the Great Depression coming. Many things caused it. The stock market crash was just one of them. It would take a decade for the country to recover.
pleawen depending on whether people buy or sell the stock. Investors make money when the market goes up. They lose money if it goes down. Stock prices crashed in October 1929. The stock market fell 25 percent in just two days. Investors d lost 90 P panicked. They sold their stocks at lower and lower prices. By mid-November the stock market had lost 50 percent. It finally hit bottom in 1932. By then it had lost 90 percent. Stock Market Crash Led To The Great Depression eser ni dant 10x160 The stock market crash badly harmed the U.S. economy. Many investors lost everything. The crash added to other economic problems the country had. It was an economic disaster known as the Great Depression. People sometimes say, "Hindsight is 20/20." They mean it is easy to see why something went wrong after it happens. Looking back, there were signs of trouble before the crash. Gary Richardson is an economics professor. He has studied the 1929 crash and the Great Depression. He says most investors knew the stock market could not keep rising. However, they did not know how it would fall or how far. "Sooner Or Later A Crash Is Coming" Roger Babson was an economist in the 1920s. He could see trouble for the stock market. He said stock prices were way too high. In 1929, he spoke at a gathering of businessmen. He said that "sooner or later a crash is coming which will take in the leading stocks and cause a decline ..." What would happen then? Investors were likely to panic as they lost money. They would try to sell their stocks while they were still worth something. More selling would drive down stock prices further. Fisher, the economist, brushed off such fears. On October 15, 1929, he told people that stock prices would stay high. He was very wrong. The stock market crash began two weeks later. The Federal Reserve is the central bank of the United States. It oversees other banks. It also helps manage the U.S. economy. It is often referred to as the Fed. The Fed Had Concerns Before Market Crash Before the crash, the Fed had worries about the stock market. It believed the market was rising too fast. Part of the problem was how people were investing. Some investors were borrowing money to buy stocks. Investment brokers made these loans. Investors might pay 10 percent of a stock price to buy the stock, for example. They had to borrow the other 90 percent. This practice is known as "buying on margin." Buying on margin is risky. It lets investors borrow money to buy stock. If all goes well, the stock price goes up. Then it is great. Investors can pay off the loan with the money they make. But what if share prices go down? Then investors can lose a lot of money very quickly. The broker can tell the investor to repay the loan immediately. Buying on margin contributed to the rising stock market. People were buying stocks with money they didn't really have. The Fed wanted to slow or stop this practice. They believed they could cool off the stock market.
Transcribed Image Text:pleawen depending on whether people buy or sell the stock. Investors make money when the market goes up. They lose money if it goes down. Stock prices crashed in October 1929. The stock market fell 25 percent in just two days. Investors d lost 90 P panicked. They sold their stocks at lower and lower prices. By mid-November the stock market had lost 50 percent. It finally hit bottom in 1932. By then it had lost 90 percent. Stock Market Crash Led To The Great Depression eser ni dant 10x160 The stock market crash badly harmed the U.S. economy. Many investors lost everything. The crash added to other economic problems the country had. It was an economic disaster known as the Great Depression. People sometimes say, "Hindsight is 20/20." They mean it is easy to see why something went wrong after it happens. Looking back, there were signs of trouble before the crash. Gary Richardson is an economics professor. He has studied the 1929 crash and the Great Depression. He says most investors knew the stock market could not keep rising. However, they did not know how it would fall or how far. "Sooner Or Later A Crash Is Coming" Roger Babson was an economist in the 1920s. He could see trouble for the stock market. He said stock prices were way too high. In 1929, he spoke at a gathering of businessmen. He said that "sooner or later a crash is coming which will take in the leading stocks and cause a decline ..." What would happen then? Investors were likely to panic as they lost money. They would try to sell their stocks while they were still worth something. More selling would drive down stock prices further. Fisher, the economist, brushed off such fears. On October 15, 1929, he told people that stock prices would stay high. He was very wrong. The stock market crash began two weeks later. The Federal Reserve is the central bank of the United States. It oversees other banks. It also helps manage the U.S. economy. It is often referred to as the Fed. The Fed Had Concerns Before Market Crash Before the crash, the Fed had worries about the stock market. It believed the market was rising too fast. Part of the problem was how people were investing. Some investors were borrowing money to buy stocks. Investment brokers made these loans. Investors might pay 10 percent of a stock price to buy the stock, for example. They had to borrow the other 90 percent. This practice is known as "buying on margin." Buying on margin is risky. It lets investors borrow money to buy stock. If all goes well, the stock price goes up. Then it is great. Investors can pay off the loan with the money they make. But what if share prices go down? Then investors can lose a lot of money very quickly. The broker can tell the investor to repay the loan immediately. Buying on margin contributed to the rising stock market. People were buying stocks with money they didn't really have. The Fed wanted to slow or stop this practice. They believed they could cool off the stock market.
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