In the 1920's how did a stock broker earn money on the sale of a stock?

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brettd eNotes educator| Certified Educator

The 1920s saw the largest economic expansion in US history up to that point.  Times were good and looked like they would stay that way, but underneath the surface, some dangerous things were happening.

The stock market was badly inflated by 1929, meaning most of the stocks being bought and sold were traded at values much higher than they were actually worth.  What's more, ordinary citizens without much money could still purchase stock using margin buying.  Here's one major way stock brokers would make money, as the customer was borrowing up to 90% of the stock's cost from the broker through a bank, and they paid both a commission and a fee for this service.  As long as the market went up, everybody won.

Stock brokers cleaned up using this method for the better part of 8 years.  Once prices started to drop, people dumped their stocks because they owed the margin, or the banks demanded their money and sold the stocks for them (a "margin call"), all of which drove prices down further.  It was good while it lasted, but today there are much stricter limits on margin buying, and stock brokers make most of their money off of commissions when their clients make money.