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Posted on 15 April 2011 | 17,935 views

Stock Brokers and Margin Loans in the 1920s

In the 1920s people were investing with money they couldn’t afford through broker loans. The world markets heavily relied on the US market conditions which showed extraordinarily high p/e ratios.

Margin requirements were also loose back in the 1920s. In other words, brokers required investors to put in very little of their own money. Whereas today, the Federal Reserve’s margin requirement limits debt to 50 percent, during the 1920s leverage rates of up to 90 percent debt were not uncommon.

With so many people buying stocks in the 1920s on margin, “New York Stock Brokers” on the floor of the New York Stock Exchange noted stock transactions on the “Ticker Tape” which was originally a strip of thin paper on which “Runners” would take those strips to nearby investment houses.

Today, a transaction on a stock exchange must be made between two members of the exchange — an ordinary person may not walk into the New York Stock Exchange and ask to trade stock as such an exchange must be done through a broker.

There are three types of stockbroking service.

* Execution-only, which means that the broker will only carry out the client’s instructions to buy or sell.
* Advisory dealing, where the broker advises the client on which shares to buy and sell, but leaves the final decision to the investor.
* Discretionary dealing, where the stockbroker ascertains the client’s investment objectives and then makes all dealing decisions on the client’s behalf.

Roles similar to that of a stockbroker include investment advisor, and financial advisor. A stockbroker may or may not be also an investment advisor, and vice versa.

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