Stock indexes for the New York Stock Exchange (NYSE) started on Dec. 31, 1925. A stock index is a measure of market performance over time, based on a one number average of the stocks of a selected segment of the market. However, 1925 was not a landmark year itself, rather simply the time from which the index was first calculated and published to guide a new generation of stock purchasers.
Two companies, Poor’s Publishing and Standard Statistics, began to rate securities in 1922 and 1923. In 1926, the companies began publishing the Standard and Poor’s Composite Index (S&P) for 90 securities traded on the NYSE, using Dec. 31, 1925, as the base date. S&P is a value-weighted index, meaning that the stock’s performance is determined by the market value.
Public perception of the stock market was changing in 1925. Efficient stock exchanges made trading opportunities widely available. A bull market encouraged new investment by the middle class, who approached the market as a vehicle for short-term profit-taking rather than long-term investment. The 312 million transactions completed in 1919 grew to 453 million in 1925, and then continued to 922 million by 1928 in a speculative bubble driven by market psychology rather than value.
Before World War I, the few banks that sold stocks could offer a limited number of government, railroad, heavy industry and utility securities. Investment was a venture for the wealthy. Stock prices were stable, because in the absence of income tax and profits were distributed through dividends. During the war, the United States created a middle class market of 22 million patriotic investors by financing the war with $27 billion in Liberty Bonds and Victory Bonds. The success of the war bond drives encouraged corporations to make public offerings to a new demographic of investors who had just discovered securities.
Among 1925 trading practices, banks and corporations made “broker’s loans” to stockbrokers for their clients, who then deposited the funds into a margin account to purchase stocks from the broker. Margin investors usually borrowed 75 percent of the cost of a purchase. High demand drove weekly rates for margin loans higher than other short-term rates, and in some cases, higher than the return on the stocks purchased. Profit was only possible when stock values increased sharply. Brokers loans contributed to the stock market crash of 1929.
Herbert Hoover was Secretary of Commerce in 1925 and U.S. President in 1929. He regarded brokers loans and margin purchases as a sign of speculation (gambling) rather than investment. Under his direction in 1925, the Federal Reserve and the NYSE tracked and published the volume for broker’s loans, which totaled over $3 billion. That news prompted a market decline in 1926. Between January and April, the amount of broker’s loans declined to $950 million. Defenders of margin purchases suggested that a high amount of broker’s loans was necessary for a bull market.
Stock market performance for 1925 was summarized in the Nov. 16 issue of Time Magazine. On Nov. 6, there were 613 issues traded in a single day. The stocks of 50 “prominent corporations” traded at record highs. Several days had seen 2.8 million shares traded, with an additional 30 percent of that amount in trades of odd lots (sales under 100 shares). Common stocks of U.S. Steel traded “tremendous volume” at record highs.