The Stock Market in the 1920s

What are shares?

A share is part-ownership in a company. Buying shares is a way in which people can invest in businesses.

What is a shareholder?

Businesses sell shares, which are bought by shareholders. The money is used by the business to expand and increase production.

What are the dividends of shares?

When the business has made a profit, it gives some of it to shareholders. This is known as a dividend.

How does the stock market relate to shares?

The stock market is a place to buy and sell shares, and it decides how much each share is worth.

What affected share value in 1920s America?

In 1920s America, 2 main factors affected the value of shares:

• ❖ The performance of the company, how well it was doing, and how much profit it was expected to make.
• ❖ The demand for shares. The more people who wanted to buy shares in a particular company, the higher the price of the shares.

How did the buying of shares change in the 1920s?

During the 1920s, there were a number of changes to the way that shares were bought and sold.

• ❖ Before the 1920s, people usually bought shares to keep, making their money from dividends. However, share prices rose so much in the 1920s that people starting speculating - buying shares to sell at a profit.
• ❖ More people bought shares, hoping to 'get rich quick' through speculation. In 1920, one in twenty Americans was a shareholder, but by 1929 it was one in six.
• ❖ Before the 1920s, shares tended to be bought and sold by rich people and banks. However, during the decade it became more common for ordinary people to speculate as well.
• ❖ During the 1920s, banks began to lend people money to speculate with. People were able to buy shares with just a 10% deposit, and pay off the debt when they had sold their shares. This was called 'buying on the margin'.

What were the effects of changes to shares in the 1920s?

The increased popularity of shares and speculation in the 1920s had a number of effects on the economy. Some of these were positive but some were negative.

• ❖ People made huge profits from speculation, and therefore had more money to spend on goods.
• ❖ Businesses could use the money that they received from selling shares to increase production and expand.
• ❖ Because they were buying shares on the margin, people regularly got into debt to the banks. They could only pay back the banks if share prices continued to rise.
• ❖ Because so many more people wanted to buy shares, share prices went up due to demand, not because the company was doing well. Share values were much higher than the company was really worth.

What were the positive effects of changes to shares in the 1920s?

The increased popularity of shares and speculation in the 1920s had a number of effects on the economy. Some of these were positive.

• ❖ People made huge profits from speculation, and therefore had more money to spend on goods.
• ❖ Businesses could use the money that they received for shares to increase production and expand.

What were the negative effects of changes to shares in the 1920s?

The increased popularity of share and speculation in the 1920s had two key negative effects.

• ❖ Because they were buying shares on the margin, people regularly got into debt to the banks. They could only pay back the banks if share prices continued to rise.
• ❖ Because so many more people wanted to buy shares, share values went up because of demand, not because the company was doing well. Share values were much higher than the company was really worth.