Stock Market Crash

the investors, so when on October, 24 prices started falling, many investors decided to

sell their shares. The leading Wall Street bankers tried to stabilize the situation on

Friday, but could not find a proper solution. Over the weekend the market crash was

discusses in the newspapers and arose the panic among the stockholders. Thus, on

Monday Dow Jones fell more than 12%. To worsen the situation, telephone and

telegraph lines could not cope up with the increase of their usage and collapsed,

contributing to panic spread. On Black Tuesday, the day of chaos, people were

desperate to sell their stocks to get at least something back. Besides, many of them had

to get rid of the stocks due to margin calls. In two days Dow Jones Industrial Average

fell 23%. This market crash inflicted huge financial loss on investors and companies. In

1932 and 1933 the stock prices hit the bottom, being down about 80% from their highs

in the late 1920s. This had sharp effects on the economy. Demand for goods declined

as people felt poor because of their huge losses in the stock market. New investment

could not be financed through the sale of stock, because nobody would buy a new

stock. The period of the Great Depression followed this crash brought destruction and

bankruptcy to many companies. After this crash U.S. Congress passed several

measures to prevent such disasters in the future. FDIC and SEC were created and

several laws were passed to secure the market.

Another famous crash happened on October, 19 1987, also known as Black

Tuesday. Several factors contributed to it, however people do not agree what was the

main one. This crash was also preceded by the period of strong economy. From 1982 to

1987 DJIA grew from 776 to 2722. World’s markets were growing too. There are no

obvious reasons for the crash: no major news or causes for panic. The prices started

falling since October, 14: DJIA fell 3.82% on Thursday and 4.60% on Friday. It first

began in Hong Kong, spread to Europe and affected the US markets as well. The main

cause is believed to be program trading, which is the use of computers to control the

trading process and portfolio insurance strategies. Computers became an important part

of the trading process in the USA, thus some specialists claim that program trading

aroused speculative boom and contributed to market crash by allowing the investors

blindly sell their stocks. However, this cause can not be the main one, because the

crash started in Hong Kong, where program trading was not popular. Another cause of

this crash can be political debates and decisions that made world’s currencies unstable.

Also there were some discussions about dollar devaluation in the future. Plus there

were exaggerated fears of inflation. Many investors lost confidence in American

economy, which led to panic among investors. Besides, during that time many people

bought portfolio insurance. When the market started falling, those people began to sell

their stocks because of margin calls and it accelerated the decline. Definitely a crash

was caused by different interconnected events. High level of speculations, high P/E

ratios, high oil prices, the influence of program trading and portfolio insurance strategies

along with global loss of confidence in the stability of the US dollar- all these things

created tension that led to the crash on October, 19 1987. This crash was a world-wide

phenomenon: out of 23 industrial countries in 19 of them markets fell for more than

20%. Many people feared the crash is a sign of world’s economic depression; however

worlds markets could recover in a comparatively short time. For instance, DJIA regained

all of its value in two years.        

The market crash that we witnessed recently was not as big as the above two.

The causes for it are similar to the crash of 1929. This stock market crash started in

Shanghai Stock Exchange. The main reason for it was a high level of speculations. The

P/E ratios were growing rapidly, tempting people to buy more stocks. The prices for

many stocks tripled in the past year. These are unprecedented gains in stock values.  

The assets of the stocks were overvalued. Many people who have only a vague

knowledge of investment strategies took huge loans and started buying stocks, hoping

to sell them shortly for a bigger price. This strategy is called “Greater Fool’s theory”. The

government was trying to raise interest rates on the loans and to enforce new taxes on

stock gains. The rumors spread over the weekend and on Monday many people started

selling their stocks in panic. When this market bubble broke the Shanghai’s market

dropped on February, 27 2007. The drop of the market in China affected the markets all

over the world, as many investors who lost in China had to sell their stocks in other

markets to cover the losses. Thus, on February 28 2007 world markets fell 2.3% to 4%.

The consequences of the crash were not very dramatic and many markets were

partially or completely restored in the few days. However, this crash shows us that a

disaster can happen if people will keep on investing without caution.  

   

Returning back to the three main forces of the market crash I have to admit that

they are all present today: the manipulation of stocks is present, although it is more

regulated by governments and special organizations like SEC; many people still borrow

money to buy stocks and have to respond the margin calls is case the market falls;

excessive optimism is present as well - P/E rations are above their historical averages

and keep on growing. Thus, I suppose that another market crash might happen in the

future, but, hopefully it will not be as huge as the ones in 1987 and 1929.