- Introduction to Stock Market
- History of the Stock Market
- Major Stock Market Crashes
- The Bulls, the Bears and the Farm
- Different Types of Stocks
- How To Buy And Sell Stocks
- The Benefits and Risks of Stocks
- Reasons Behind Changes of Stock Prices
- Psychology of Stock Market Trading
- Unifunds and Stock Market Trading
Stock market crashes are a social phenomena combining psychology and crowd behaviour, and are an unavoidable side effect of any market where public attitudes play a role.
In general, a stock market crash normally occurs when there has been a sustained period of rising stock prices combined with extravagant economic optimism, extensive use of leverage and margin debt by market participants. While there is no numerically-specified definition of a market crash, the term normally lends itself to a dramatic double-digit percentage loss in a market index over a multi-day period.
Throughout history, stock market crashes have often had far reaching effects, with the most famous being the stock market crash in 1929, which became the catalyst for the Great Depression.
On August 24, 1921, the Dow Jones Industrial Average stood at a value of 63.9, rising more than six-fold by September 3, 1929. By the summer of 1929, the stock market went through a series of unsettling price declines. These declines fed anxiety and events soon came to a head. October 24 known as Black Thursday was the first in a number of increasingly shocking market drops. This was followed by Black Monday on October 28 and Black Tuesday on October 29.
Other major stock market crashes include:
- Stock Market Crash of 1973-1974
- Black Monday of 1987
- Dot-com Bubble of 2000
- Stock Market Crash of 2008
All of these crashes pale in comparison to 1929, however, but still involved double-digit percentage losses around the world. The advance of electronic trading has caused many to question the foundations of the stock market, including the theory of rational human conduct and the theory of market equilibrium.
The stock market crash of 1987 was the first major crash of the electronic trading era and it was notable due to the fact that nobody really saw it coming. It was not predated by major news announcements or world affairs. Instead, it seemed to have just happened with no immediately apparent visible reasons. The 1987 crash began in Hong Kong, where stock markets fell 45.5% between October 19 and October 31. By the end of October, major stock markets around the world all experienced double-digit collapses.
Markets in Australia experienced a 42% drop while the United States and Canada both suffered losses of about 23%. The least affected was Austria with a fall of 11.4% while the most affected was Hong Kong with a drop of 45.8%. Out of 23 major industrial countries, 19 had a decline greater than 20%.
Despite fears of a repeat of the 1930s Depression, the market rallied immediately after the crash. It took only two years for the Dow to recover completely, and by September 1989, the market had regained all of the value it had lost in the 1987 crash.
The 2008 stock market crash and the stock market crash in 2010, often referred to as the 'flash crash', are other notable market crashes, which saw a wave of panic selling resulting in the massive loss of paper wealth.
Unifunds would like to emphasise that it is crucial for investors, both veterans and beginners alike, to understand the history of stock market crashes and the circumstances that led to them. By recognising the signs of a stock market crash, an investor can better position oneself to weather the fallout and even profit from the fear and panic in the market.