So, you want to learn about stock market crashes?
This article will discuss the stock market and the concept of “stock market crash.”
Stock Market Definition
The “stock market” is a marketplace where shares (“stocks”) of publicly held companies are issued and traded. Stocks can be traded through exchanges or over-the-counter markets. The stock market makes it possible for an “average Joe” to “win the lottery” so to speak, i.e., for a regular person to take a small amount of money and make a larger amount of money by investing it in the stock market and just letting it sit there and make money. The stock and the economy will work for you, so you don’t have to! The stock market is not without its flaws, however. Stock markets are not perfect, and sometimes they let investors down. Folks can loose money when the stock market crashes! In the next section, we’ll learn about the concept of the stock market crash.
Stock Market Crash Definition
A “stock market crash” is a sudden, dramatic decrease of the prices of stock that spans a significant cross-section of the stock market. This results in a significant loss of “paper wealth,” i.e., money! Stock market crashes are caused by several factors. Public panic about the stock market, the economy and wealth can help spurn on a stock market crash. Additionally, economic factors can contribute to a stock market crash. Underlying economic factors may include the decreased value of the currency of a country (such as the American dollar); a decrease in the amount of exports as compared to imports; and a high unemployment rate. Stock market crashes often come after speculative stock market bubbles.
When did the stock market crash?
You might be asking, when did the stock market crash in the United States? The stock market in the United States has suffered two major crashes - in 1929 and in 2008. Luckily the stock market and the country recovered from these crashes! We’ll discuss a little bit about the 1929 stock market crash and the 2008 stock market crash below.
The Stock Market Crash of 1929
The stock market suffered a crash in 1929. But what led up to this 1929 stock market crash? Let’s explain. For most of the 1920’s, the United States economy “boomed,” as a result of several technological advances during that decade and time period overall. Inventions such as the automobile, radio, planes, the telephone and the power grid were deployed and adopted. The stocks for the companies that were associated with these inventions, like General Motors (with the automobile) and the Radio Corporation of America (RCA), saw their stocks sore.
Throughout the 1920’s, stocks rose in the United States. In fact, in 1921, the Dow Jones Industrial Average (the Dow), was 63.9. By September 1929, it had risen sixfold, to reach 381.2. However, over the summer of 1929, the economy had been experiencing “contractions,” which made investors anxious. This was the beginning of a “domino effect” of events that led up to the stock market crash of 1929.
The investor anxiety from the summer fueled a drop in the Dow on “Black Monday” (October 28, 1929) to 260, a drop of 38 points and 12.8%. This drop resulted in investors hurriedly selling their stock which overwhelmed the then-new ticker tape system on Wall Street. (The ticker tape system normally listed the current value of investor shares). Telephone and telegraph lines were clogged, so investors were unable to know what was going on, which fueled more anxiety. The next day, “Black Tuesday” (October 29, 1929), investors came to Wall Street with a deluge of sell orders, which caused the Dow Jones to drop another 30 points. On Black Tuesday, the stock market closed at 230. By the end of the weekend of November 11, the Dow had fallen again to 228, a 40% drop from September. The Dow experienced some up and down fluctuations but finally “bottomed” in July 1932.
The stock market crash of 1929 caused The Great Depression, the worst economic crisis America had experienced in modern times.
The 2008 Stock Market Crash
Although the 1929 stock market crash was huge, the 2008 stock market crash experienced the largest drop of stock on Wall Street in a single day that America had ever seen! Overall, the 2008 stock market crash did not caused another economic depression in the United States, but it did fuel another type of economic crisis, a recession.
In September 2008, the United States House of Representatives rejected the government’s $700 billion bank bailout plan. This was a last effort to save the banks, which had been failing not only in the United States but internationally. In the United States, 15 banks had failed. Some had been rescued by government efforts and others were bought out by other banks. Thus, on September 29, 2008, the Dow dropped $1.2 trillion in market value, the biggest ever single-day crash in U.S. history. Six days later, on October 15, 2008, the Dow dropped again by 7.9%.
Over the next months, the market continued to decline in the United States and internationally. By March 6, 2009, the Dow Jones had dropped 54% overall, from 14,161 in October 2007 to 6,469. The market then began to recover.
Is the Stock Market Going to Crash? The next stock market crash
After reading this article about the stock market and the 1929 stock market crash and the 2008 stock market crash, you might be wondering, “When is the next stock market crash?”, and “Is the stock market going to crash?” Hopefully the stock market in the United States and internationally will not crash anytime soon! There are several “mitigation strategies” that the United States and other countries employ to prevent such stock market crashes.
“Trading curbs,” (also known as “circuit breakers”) is one strategy that the United States and other countries use to prevent a stock market crash. Trading curbs force investors to stop trading when the market moves in a substantial direction. In the United States, there are three “thresholds” for trading curbs, i.e., numbers that trigger some kind of “stop” in the stock market for the day. The thresholds are calculated at the end of each quarter, and when the threshold is breached, there are various rules that force Wall Street to close for the day. These curbs will hopefully prevent a surge of anxiety when the market drops suddenly, so it falls but doesn’t ultimately “crash.”
With the economy the way it is right now in the United States, it is not likely that the stock market will crash! The Dow Jones has been moving steadily upward since 2009 and the 2008 stock market crash, as have the New York Stock Exchange (NYSE) (up 165% since 2009) and the NASDAQ (up 275%).
In America, the 2008 stock market crash was bad; the 1929 crash was worse! Investor anxiety is a huge cause of the stock market crashing, so the United States and other countries have employed “mitigation strategies” to prevent future stock market crashes. Despite this, it is unlikely that the stock market will crash anytime soon. Don’t hold your breath for the next stock market crash - it’s not coming in 2015!