A stock market crash is when there is sudden and rapid drop in prices of a majority of stocks. Sometimes, it is a result of a major catastrophe, but is usually driven by panic. Anticipating losses many stockholders attempt to sell their stocks, which ultimately causes the prices to go down further, resulting in a vicious cycle. A stock market crash might also be followed by inflation or recession and can last for years.
Stock market crashes have been far too many to enlist, right from the Kipper und Wipper financial crisis in the Roman Empire, to the Dow Jones that dipped last minute. So, what we’ve done in this Buzzle article, is restricted our time frame to the last 100 years, and picked the worst of the entire lot.
– Andrew W. Mellon, Secretary of the Treasury in September, 1929.
The build up to this crash saw a massive increase in the Dow Jones Industrial Average (DJIA), reaching a peak rise in early September. Later that month, when the LSE crashed, the ripples were felt across the Atlantic, kick starting a period of instability. Newspapers across the US covered the heavy trading that took place in the last week of October as people scrambled to liquidate their stocks.
On October 29th, 1929, 16 million shares were traded, which led to a sharp dip of 12%. The combined losses of October 28th and 29th amounted to $30 billion, and the aftermath of this crash saw a slump in the economy which lasted until 1954, a good decade and a half after the Second World War ended.
– John Templeton, investor and mutual fund pioneer, in the week that saw the 1987 stock market crash.
The DJIA made a smooth recovery, remaining positive for the rest of the year, and met its previous high of 2,722 points almost 2 years later.
– David Lereah, The National Association of Realtor’ chief economist, in his book Are You Missing the Real Estate Boom? (2005)
It all started when financial institutions began to create policies that actively supported home ownership by making way for easily accessible mortgages, assuming that the real estate market would remain a permanent goldmine. That was not to be, of course, resulting in evictions, foreclosures, not to mention the escalating number of unemployed people.
The world economy slowed down, and its repercussions were felt in the international trade sector. The UK spearheaded the European Union’s response by announcing several austerity measures.
– Barack Obama, President of the United States, speaking at a fundraiser in August, 2011.
For stock markets worldwide, the rest of the year remained volatile, with consumers preferring to invest in gold, considered to be a relatively secure option. As a result, gold prices escalated to more than $1700.
– Franklin D. Roosevelt, the 32nd President of the United States, on the New Deal economic program.
Politically speaking, the atmosphere in Europe was getting volatile, not offering any respite to the markets in the United States as well. The Roosevelt government had to take the heat for their poor policy choices during the Depression era.
– Mohammad Reza Pahlavi, the Shah of Iran, commenting on the oil crisis of 1973.
The UK took the worst hit, with the London Stock Exchange’s FT 30 falling by 73%. It was also accompanied by banking and property market crisis, pushing UK to recession. All the major stock markets were also affected, and many losing over 43% of their market value.
– Sean Parker, Co-founder of Napster, on the NASDAQ crash of 2000.
By the end of 2001, the bubble had pretty much deflated, with many companies having to shut shop after plundering their venture capital, and never notching a profit.
Stock markets are too tempting an investment opportunity to sideline, as many of us would agree. The key to gaining success here, lies in capitalizing on favorable opportunities, and of course, knowing when to stop. The best lesson learned from all the examples mentioned above is to pay heed to the signs of extravagance – and realize that the bubble is soon going to burst.