Crashes and the rules they brought · 1929–1950s
1933–1934
Securities laws and the SEC
New laws require companies to disclose facts before selling shares, and create the SEC.
The Securities Act of 1933 made companies publish a prospectus before selling shares to the public and held underwriters responsible for its accuracy. The Securities Exchange Act of 1934 created the Securities and Exchange Commission and gave the Federal Reserve power to limit borrowing to buy stock.
💡 Why it made sense then
In the 1920s buyers often knew far less than sellers. The laws aimed to put the facts in front of every investor and to curb the borrowing behind the crash.
Ideas it gave us
- 📈 Underwriter
An underwriter is the investment bank that manages a new stock or bond issue, pricing it and selling it to investors in return for a fee.
- 🏗️ Information asymmetry
Information asymmetry is when one side of a deal knows more than the other. It can cause adverse selection, where bad products or risks drive out good ones.
- 🎯 Margin
Buying on margin means borrowing money from your broker to buy more stock than your cash alone allows, using your investments as collateral.
Practise with $10,000 in play money
Free. No real money involved.