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How did buying stocks on margin make the stock market crash of 1929 worse?
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Great Depression
Unemployed men standing in line outside a soup kitchen, Chicago.
Buying stocks on margin significantly worsened the stock market crash of 1929 by creating a volatile cycle of forced selling. During the 1920s, many investors purchased shares by paying only a small fraction of the price—often 10 percent—and borrowing the remainder from brokers, using the stocks themselves as collateral.123
When stock prices began to decline in October 1929, this practice triggered a dangerous chain reaction:
- Margin Calls: As the value of the stocks fell, brokers issued margin calls, demanding that investors provide additional cash or securities to cover the loans.2
- Forced Liquidation: Many investors, unable to meet these demands, were forced to sell their holdings at rapidly declining prices to pay back their debts.13
- Vicious Cycle: This wave of panic selling further depressed stock prices, which in turn triggered more margin calls and additional forced liquidations.2
This speculative excess, fueled by borrowed money, amplified the market's downward spiral and contributed to the widespread financial distress that precipitated the Great Depression.13