Stock Market Crashes
There have been three (now four?) major Stock Market Crashes in the history of the stock market. The one that is quite often talked about is the stock market crash of 1929.
This crash came at the height of what was known as the "roaring twenties". These years were marked by increased industrialization and new technology.
From 1921 to 1929 the Dow Jones soared from 60 to 400! Millionaires were made overnight! No-one studied the fundamentals.After all the market was always going up.
No-one knew or expected that a crash would be eminent.
Here is what happened..
The crash of 1929
On September 3, 1929, the stock market hit an all-time high with the Dow Jones Industrial Average closing at 381.17.
Banks were heavily invested in stocks, and individual investors borrowed on margin to invest in stocks.
Everything looked great!
On the morning of October 24, 2009 the market lost 9% of its value and by the end of the day was down by 33 points.
The day was saved by a group of bankers who pooled their money together and invested it right back in the stock market. This convinced other investors to stop selling.
By the afternoon, the panic had subsided and investors were buying stock. In fact on that day 12.9 million shares were sold - double the previous record.
But this was only the lull before the storm
October 28, 1929 the market lost another 13%.
The very next day, October 29, 1929 - known as Black Tuesday and the day that dealt the final blow, the market lost yet another 12%, bringing the Dow 39.6% off its high.
This time no one tried to save the market. By the end of the day - over 16.4 million shares of stock were sold - a new record.
It is believed that in that week alone the market lost $30 billion in value.
After the crash, the stock market mounted a slow comeback. By the summer of 1930, the market was up 30% from the crash low.
By the summer of 1932, the Dow had lost almost 89% of its value and traded more than 50% below the low it had reached on October 29, 1929.
By August 12, 1932 the Dow hit a low of 63. This was all the way down to where the Dow began in 1896 What made this the most devastating stock market crash in the history of the United States is the fact that it ushered the great depression.
In addition - it took the stock market 25 years to return to its pre-1929 levels.
Causes of the Crash? Here are a few:
1. Overvalued Stocks - Some analysts also maintain stocks were heavily overbought.
2. Low Margin Requirements. At the time of the crash, you needed to put down only 10% cash in order to buy stocks - this was a 10:1 margin.
For example - If you wanted to invest $10,000 in stocks, only $1,000 in cash was required.
3. Interest Rate Hikes. The Fed aggressively raised interest rates on broker loans.
4. Poor Banking Structures. There were few federal restrictions on start-up capital requirements for new banks. As a result, many banks were highly insolvent.
When these banks started to invest heavily in the stock market, the results proved to be devastating, once the market started to crash. By 1932, 40% of all banks in the U.S. had gone out of business.
Following the Crash:
1. The Securities and Exchange Commission (SEC) was established, and the Glass-Stegall Act was passed.
This act separated commercial and investment banking activities.
Over the past decade though, the Fed and banking regulators have softened some of the provisions of the Glass-Stegall Act.
3. In 1933, the Federal Deposit Insurance Corporation (FDIC) was established to insure individual bank accounts for up to 100,000.
True or not true?
There have been stories about the stock market "crash" of 1929 causing dozens of people to commit suicide by jumping out of windows.
There is no evidence that anyone leapt to their death because of the market crash, although several did shoot themselves.
One man decided to end his misery by leaving his gas stove on and then taking a long nap. And then there was the guy who had a heart attack at his broker's office watching the dropping numbers on the ticker tape.
The one person reported to have jumped from an upper floor of the Plaza Hotel in New York City, did so several days before the market tumbled.
Will Rogers, the great humorist, picked up on it and included the "jumping out of windows" in his routine for a number of years.
Do you want to read more about the other market crashes? Click on any link below to read about the other Stock Market Crashes