A Level History - America - Practice Exam

What was the impact of buying on margin in the stock market?

1. It prevented people from borrowing money

2. It increased the overall wealth of investors

3. It led to significant losses when values dropped

4. It resulted in high bank savings

The correct answer is: It led to significant losses when values dropped

The impact of buying on margin in the stock market primarily led to significant losses when stock values dropped. This practice allowed investors to purchase more shares than they could afford by borrowing money from brokers, using their existing investments as collateral. While this could amplify profits when stock prices rose, it also exposed investors to tremendous risk. If market values declined, investors not only lost their initial investments but were also required to repay borrowed funds, resulting in substantial financial losses. This contributed to the economic instability that culminated in the Great Depression when stock prices crashed in 1929, leading to widespread ruin and bank failures. The other choices do not accurately reflect the reality of margin buying; rather, they misrepresent its effects. It certainly did not prevent borrowing—on the contrary, it facilitated it. While buying on margin could temporarily increase the wealth of some investors during bull markets, the more immediate and historical consequence was the severe losses experienced by many when the market turned sour. Lastly, the suggestion that it resulted in high bank savings misrepresents the nature of financial behavior during periods of margin buying in the stock market.