What Causes Stock Market Crashes?

Stock market crashes are often caused by several economic factors such as speculation or panic selling which can occur during an economic crisis or major catastrophic event like Wall Street Crash of 1929 which led to Great Depression.

What Causes Stock Market Crashes?

Stock market crashes are often the result of several economic factors, such as speculation, panic selling or economic bubbles, and can occur amid the consequences of an economic crisis or a major catastrophic event. The Wall Street crash of 1929, also known as the Great Crash, was a sudden and sharp drop in stock prices in the United States in late October of that year. Over the course of four business days from Black Thursday (October 2) to Black Tuesday (October 2), the Dow Jones industrial average fell from 305.85 points to 230.07 points, representing a decline in stock prices of 25 percent. The main cause of the Wall Street crash of 1929 was a long period of speculation that preceded it, during which millions of people invested their savings or borrowed money to buy stocks, driving prices to unsustainable levels.

Other causes included a rise in interest rates by the Federal Reserve in August 1929 and a slight recession earlier that summer, contributing to the gradual fall in stock prices in September and October, ultimately leading investors to panic. The stock market crash of 1929, also called the Great Crash, was a sharp decline in stock securities in 1929 that contributed to the Great Depression of the 1930s. The Great Depression lasted approximately 10 years and affected both industrialized and non-industrialized countries in many parts of the world. Prices began to fall in September and early October, but speculation continued, driven in many cases by people who had borrowed money to buy stocks, a practice that could only be maintained as long as stock prices continued to rise.

On October 18, the market went into free fall and the rush to buy stocks gave way to an equally wild rush to sell. The first day of real panic, October 24, is known as Black Thursday; a record 12.9 million shares were traded that day as investors scrambled to save their losses. Even so, the Dow closed just six points after several major banks and investment companies bought large blocks of shares in a successful effort to stop the panic that day. However, their attempts ultimately failed to shore up the market.

Many factors are likely to have contributed to the stock market crash. Among the most prominent causes were the period of unrestrained speculation (those who had bought shares on margin not only lost the value of their investment, but also owed money to the entities that had granted the loans for the purchase of shares), the tightening of credit by the Federal Reserve (in August 1929, the discount rate rose from 5 percent to 6 percent), the proliferation of holding companies and investment trusts (which tended to create debt), a multitude of large bank loans that couldn't be liquidated, and an economic recession that had begun in early summer. A market crash is a sharp and sudden drop in stock prices that can be caused by a variety of factors. There is no established reference point for what constitutes an accident.

While New York stocks protected commercial banks, the stock market crash continued to hurt trade and manufacturing. The crash scared investors and consumers; men and women lost their life savings, feared for their jobs and worried about being able to pay their bills. Fear and uncertainty reduced purchases of expensive items, such as cars, that people bought with credit. Companies, such as Ford Motors, saw demand fall, reducing production and suspending workers.

Unemployment increased and the contraction that began in the summer of 1929 deepened (Romer 1990; Calomiris 199). Being more proactive in the face of market changes is more important when you are closer to this point; I would continue to stick to a cautious line and I really don't see any ideas that generate a lot of money in general markets as such. A couple weeks later, the Dow lost half its value (the S&P 500 and Nasdaq were not used as markers at this time) and entered a prolonged bear market. The stock market crash of 1929 was not only responsible for causing the Great Depression but it also acted as an accelerator for global economic collapse which it was also a symptom of.

Whichever way you look at it, a stock market crash occurs when confidence and value placed on publicly traded assets decline causing investors to sell their positions and move away from active investment towards keeping their cash or its equivalent. A mitigation strategy has been introduced with trading restrictions also known as circuit breakers which are an interruption in trading in cash markets and corresponding interruption in trading derivatives markets caused by disruption in cash markets all affected based on substantial movements in broad market indicator. Other causes for stock market crash of 1929 included low wages, proliferation of debt, struggling agricultural sector and excess large bank loans which could not be liquidated. It only took two years for Dow to fully recover; by September 1989 market had regained all value it had lost during 1987 crash with its broadest pair NSE Nifty also falling 186.70 points or 1.09 percent below 17200 mark with more than 80% shares falling during trading session where trading many stocks met with pathological condition where offer price for stock exceeded sale price.

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