Buying Stocks on Margin Can Be Dangerous
In some extreme cases, margin caused serious economic troubles. During the Crash of 1929 proceeding the Great Depression, maintenance requirements were only 10% of the amount of the margin loan; brokerage firms, in other words, would loan $9 for every $1 an investor had deposited. If an investor wanted to purchase $10,000 worth of stock, he would only be required to deposit $1,000 upfront. This wasn't a problem until the market crashed, causing stock prices to fall.
When brokers made their margin calls, they found that no one could repay them since most of their customers' wealth was in the stock market. Thus, the brokers sold the stock to pay back the margin loans. This created a cycle until eventually prices were battered down and the entire market demolished. It also resulted in the suspension of margin trading for many years.
When brokers made their margin calls, they found that no one could repay them since most of their customers' wealth was in the stock market. Thus, the brokers sold the stock to pay back the margin loans. This created a cycle until eventually prices were battered down and the entire market demolished. It also resulted in the suspension of margin trading for many years.