The Money Market And Stock Prices





Perhaps no other one thing influences the movement of stock prices so

much, in a large way, as money conditions. It is impossible to have a

big bull market without plenty of money. During a bull market nearly all

stocks are bought on margin, which is explained in Chapter XVI. This

makes it necessary for brokers to borrow large sums of money. When money

is tight, it is impossible to get enough to carry on a large movement in

stocks.



You will see, therefore, that the Federal Reserve Bank has it in its

power to regulate the stock market to some extent. In 1919 speculation

was carried very much further than it should have been, but undoubtedly

it would have been much worse had the Federal Reserve Bank not raised

interest rates and urged member banks to withdraw money from Wall

Street. While there was considerable criticism of that action, it

certainly was a good thing for the entire country.



In a period of depression, the banks accumulate money, and there always

is an abundance of money at the beginning of a bull market. During a

period of prosperity the banks' reserves decrease and their loans

increase. When you see these reserves go down to a very low point, it is

usually time for you to sell your stocks.





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