Stocks and The Stock Market
What is a stock?
Why do they matter?
Why is this relevant to the roaring 20’s
Homework

Watch the business news on CNN or BBC
and write a short paragraph (1/2 pg) on
what the story was saying and how it
relates to today's topics on money, stock
market and banks.
Or
Download and print a current article on
money, banks or the stock market and
write an explanation/summary of what the
article is about and what it is trying to say.
The Roaring 20’s
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The 1920’s were a time of peace and
great prosperity. After World War I, the
“Roaring Twenties” was fueled by
increased industrialization and new
technologies, such as the radio and the
automobile. Air flight was also becoming
widespread, as well. The economy
benefited greatly from the new life
changing technologies.
Skyscrapers and Cars
The Stock Market

The stock market appears in the news every
day. You hear about it any time it reaches a new
high or a new low, and you also hear about it
daily in statements like "The Dow Jones
Industrial Average rose 2 percent today, with
advances leading declines by a margin of..."
Obviously, stocks and the stock market are
important, but you may find that you know very
little about them. What is a stock? What is a
stock market? Why do we need a stock market?
Where does the stock come from to begin with,
and why do people want to buy and sell it?
What are Shares?
You have a restaurant which will probably make at least $75,000 this year
you know that from your history with the business. Therefore, you can think of
the restaurant as an investment that will pay out something like $75,000 in
interest every year. Looking at it that way, someone might be willing to pay
$750,000 for the restaurant, as a $75,000 return per year on a $750,000
investment represents a 10-percent rate of return. Someone might even be
willing to pay $1,500,000, which represents a 5-percent rate of return, or
more if he or she thought that the restaurant's income would grow and
increase earnings over time at a rate faster than the rate of inflation. The
restaurant's owner, therefore, will set the price accordingly. You might price
the restaurant at $1,500,000. What if 10 people come to you and say, "Wow, I
would like to buy your restaurant but I don't have $1,500,000." You might
want to somehow divide your restaurant into 10 equal pieces and sell each
piece for $150,000. In other words, you might sell shares in the restaurant.
Then, each person who bought a share would receive one-tenth of the profits
at the end of the year, and each person would have one out of 10 votes in
any business decisions.
A Stock Exchange

If I am a private citizen who owns a restaurant, and I am selling my
restaurant stock to other private citizens in the community, I might
do the whole transaction by word-of-mouth, or by placing an ad in
the newspaper. This makes selling the stock easy for me. However,
it creates a problem down the line for investors who want to sell their
stock in the restaurant. The seller has to go out and find a buyer,
which can be hard. A "stock market" solves this problem. Stocks in
publicly traded companies are bought and sold at a stock market
(also known as a stock exchange). The New York Stock Exchange
(NYSE) is an example of such a market. In your neighborhood, you
have a "supermarket" that sells food. The reason you go the
supermarket is because you can go to one place and buy all of the
different types of food that you need in one stop -- it's a lot more
convenient than driving around to the butcher, the dairy farmer, the
baker, etc. The NYSE is a supermarket for stocks. The NYSE can
be thought of as a big room where everyone who wants to buy and
sell shares of stocks can go to do their buying and selling.
Stock Exchange
Lets Visit A Stock Exchange
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Australian Securities Exchange
http://www.asx.com/

Others
www.nyse.com
 www.nasdaq.com
 www.jsx.co.id
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Stock Prices
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Let's say that a new corporation is created and in its IPO it raises
$20 million by selling one million shares for $20 a share. The
corporation buys its equipment and hires its employees with that
money. In the first year, when all the income and expenses are
added up, the company makes a profit of $1 million. The board of
directors of the company can decide to do a number of things with
that $1 million:
It could put it in the bank and save it for a rainy day.
It could decide to give all of the profits to its shareholders, so it
would declare a dividend of $1 per share.
It could use the money to buy more equipment and hire more
employees to expand the company.
It could pick some combination of these three options.
Money Questions Discussion

What is money

Definition

Why is it worth what it is?

What was the system before money?

What are some modern systems that are
making money obsolete?
What is a Bank?

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According to Britannica.com, a bank is:
an institution that deals in money and its substitutes and provides
other financial services. Banks accept deposits and make loans and
derive a profit from the difference in the interest rates paid and
charged, respectively.
Banks are critical to our economy. The primary function of banks is
to put their account holders' money to use by lending it out to others
who can then use it to buy homes, businesses, send kids to
college...
When you deposit your money in the bank, your money goes into a
big pool of money along with everyone else's, and your account is
credited with the amount of your deposit. When you write checks or
make withdrawals, that amount is deducted from your account
balance. Interest you earn on your balance is also added to your
account.
How Loans Work
Banks create money in the economy by making loans. The amount of money
that banks can lend is directly affected by the reserve requirement set by the
Federal Reserve.
Why does banking work?

Banking is all about trust. We trust that the bank will
have our money for us when we go to get it. We trust
that it will honor the checks we write to pay our bills. The
thing that's hard to grasp is the fact that while people are
putting money into the bank every day, the bank is
lending that same money and more to other people
every day. Banks consistently extend more credit than
they have cash. That's a little scary; but if you go to the
bank and demand your money, you'll get it. However, if
everyone goes to the bank at the same time and
demands their money (a run on the bank), there might
be problem.
So What Happened in 1929?

The 1929 stock market crash is conventionally said to have
occurred on Thursday the 24th and Tuesday the 29th of
October. These two dates have been dubbed "Black
Thursday" and "Black Tuesday," respectively. On
September 3, 1929, the Dow Jones Industrial Average
reached a record high of 381.2. At the end of the market
day on Thursday, October 24, the market was at 299.5 —
a 21 percent decline from the high. On this day the market
fell 33 points — a drop of 9 percent — on trading that was
approximately three times the normal daily volume for the
first nine months of the year. By all accounts, there was a
selling panic. By November 13, 1929, the market had fallen
to 199. By the time the crash was completed in 1932,
following an unprecedented large economic depression,
stocks had lost nearly 90 percent of their value.
So What?

As the Dow Jones Industrial Average soared, many
investors quickly snapped up shares. Stocks were seen
as extremely safe by most economists, due to the
powerful economic boom. Investors soon purchased
stock on margin. Margin is the borrowing of stock for the
purpose of getting more leverage. For every dollar
invested, a margin user would borrow 9 dollars worth of
stock. Because of this leverage, if a stock went up 1%,
the investor would make 10%! This also works the other
way around, exaggerating even minor losses. If a stock
drops too much, a margin holder could lose all of their
money AND owe their broker money as well.
Gamblers Always Lose

From 1921 to 1929, the Dow Jones rocketed from 60 to
400! Millionaires were created instantly. Soon stock
market trading became America’s favorite pastime as
investors jockeyed to make a quick killing. Investors
mortgaged their homes, and foolishly invested their life
savings in hot stocks, such as Ford and RCA. To the
average investor, stocks were a sure thing. Few people
actually studied the fundamentals of the companies they
invested in. Thousands of fraudulent companies were
formed to hoodwink unsavvy investors. Most investors
never even thought a crash was possible. To them, the
stock market “always went up”.
Oops!

By 1929, the Fed raised interest rates several times to
cool the overheated stock market. By October, the bear
market had commenced. On Thursday, October 24
1929, panic selling occurred as investors realized the
stock boom had been an over inflated bubble. Margin
investors were being decimated as every stock holder
tried to liquidate, to no avail. Millionaire margin investors
became bankrupt instantly, as the stock market crashed
on October 28 th and 29 th. By November of 1929, the
Dow sank from 400 to 145. In three days, the New York
Stock Exchange erased over 5 billion dollars worth of
share values! By the end of the 1929 stock market crash,
16 billion dollars had been shaved off stock
capitalization.
Where’s My Money!!!

To make matters worse, banks had invested their
deposits in the stock market. Now that stocks were
obliterated, the banks had lost their depositors money!
Bank runs started, where bank patrons tried to withdraw
their savings all at once. Major banks and brokerage
houses became insolvent, adding more fuel to the bear
market. The financial system was in shambles. Many
bankrupt speculators, who were once aristocracy,
commit suicide by jumping out of buildings. Even bank
patrons who had not invested in shares became broke
as $140 billion of depositor money disappeared and
10,000 banks failed.
The Great Depression

The stock market crash of 1929 launched the
Great Depression. The Depression was the time
from October 1929 to the mid 1930’s. Mass
poverty occurred then, as many workers lost
their jobs and were forced to live in shanty
towns. Former millionaire businessmen were
reduced to selling apples and pencils on street
corners. One third of Americans were below the
poverty line in the Great Depression. The Dow
Jones finally surpassed its 1929 high, a full 26
years later in 1955.
Bank Runs
People panic and
run to the bank to
take out their money
making the demand
for money higher
and the situation
even worse.
Krismon!
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The rapid fall in the rupiah, beginning in July-August
1997, soon revealed the underlying weakness of the
Indonesian financial sector. Panic selling of rupiah for
dollars by Indonesian companies with dollardenominated debt showed that private foreign debt was
far higher than previously thought. Worse still, the fact
that Bank Indonesia was unaware of the extent of the
debt showed its poor capacity to oversee and regulate
Indonesia's financial markets. As in Thailand, much of
the foreign debt was short-term and due for repayment
within twelve months and, with the continuing fall in the
rupiah, was increasingly difficult to service.
Indonesia
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High levels of economic growth from 1987–1997
masked a number of structural weaknesses in
Indonesia's economy. The legal system was
very weak, and there was and is no effective
way to enforce contracts, collect debts, or sue
for bankruptcy. Banking practices were very
unsophisticated, with collateral-based lending
the norm and widespread violation of prudential
regulations, including limits on connected
lending. Non-tariff barriers, rent-seeking by
state-owned enterprises, domestic subsidies,
barriers to domestic trade, and export
restrictions all created economic distortions.
Democracy at Last
Your Money

Based on what you have read about banks,
money and stock markets:

What would you do if you had 100,000 dollars to
spend?

What are some other options besides these
three for storing money?

What do you think ended the Great Depression?
HW: Essay
The stock market in the 20s was a time of
great wealth and great disaster.
Explain how the consumer culture of the
20s led to the overuse of the stock market
and how this inevitably led to the Great
Depression.