How did the stockbroker's income during the 20's on the sale of stocks become one of the factors that led to the 29 crash?

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dbello eNotes educator| Certified Educator

Stockbrokers recieved a salary from the investment firm where they were employed, however, they also recieved commissions from every investment they sold. Therefore, the more stock they sold, the larger the commission. The primary tactic that stockbrokers used to increase their sales was the 'margin sale'. To buy a stock on 'margin' essentially meant buying a stock on credit. For example, if a share of stock cost $10.00 the client could purchase the share for $1.00 or 10% using the other 90% as collateral for the credit. Payment of the margin account would be made as the stock rose in value or if a stock price lingered or dropped the client would have to make a small payment on their margin account. However, the broker's commission was on the $10.00 which he recieved upfront. This practice allowed many stockbrokers to sell any stock good or bad to those who were not really educated in the financial market. By 1928 the market began to spiral out of control, banks were calling in their margin accounts for payments at the same time people were being laid off from their jobs. By the time many of the margin purchases were called in the stocks they represented had lost their value. People didn't or couldn't pay, banks began to fail, the market was imploding from within, but the brokers had made their money.