Stock Market Crash History
A Stock Market Crash is defined as a rapid and broad-based decline of stock prices. Almost all the indices fall 20% or more in a typical crash, and that too within a few days. Such panic-driven actions are many times preceded by stock market bubbles - rapid increase in stock prices purely based on speculation. The longer the duration of the bubble, the ensuing stock market crash tends to be that much more painful. Needless to say, a stock market crash is a huge confidence-buster for you and me - the average investor.
Thankfully, there haven't been many such stock market crashes in the past. Let's take a brief look at the major ones, mainly to learn from the past so that we can try to avoid making the very same mistakes in the future.
Stock Market Crash of 1929
October 24, 1929, known as the Black Thursday, marked the start of the crash of 1929. This was followed by Black Monday and Tuesday, the very next week. The Dow Jones Industrial Average fell more than 20% just on Monday and Tuesday alone. By mid-November, the index had dropped by around 40% compared to its peak just a couple of months ago. The index lost almost 90% of its value, before it began a gradual uptrend in mid 1932.
The US economy was growing at a brisk pace in the 1920's, referred to as the Roaring Twenties. Some of the contributing factors were - the invention and popularity of air-travel, automobile, radio and telephone. Stocks rose nearly six-fold from the beginning of the decade to their peak in September 1929. Investing was cherished as a safe and sureshot method to increase one's net worth. Folks borrowed money and invested in the stock market - a practise known as investing on margin.
The 1929 stock market crash was attributed to the forced liquidation of stocks. This was because a lot of investment was done on margin, and when the value of stocks plummeted, these investments had to be sold in order to meet margin calls. Thus a lesson learnt from the crash of 1929 is - try not to invest on margin, however rosy the returns may appear to be.
Stock Market Crash of 1987
This crash occurred on October 19, 1987, now called the Black Monday. On this day, the Dow Jones Industrial Average slipped more than 500 points, or 22% of its value. Other indices were also affected badly - the S&P500 lost 20% and the NASDAQ Composite fell 11%. Why NASDAQ didn't fall as much as the other two was probably because the underlying market making system failed and the system was totally deadlocked. So far, the 1987 stock market crash is the largest one-day decline in history.
The 1980's were a period of fervent economic growth. The Oil Crisis of the late 70's was gradually winding down, with oil prices falling by two-thirds between 1981 and 1986. The stock market was in the forefront of it all. The Down Jones Industrial Average rocketed 3.5-fold between 1982 and 1987. Fundamental reasons like the falling US Dollar coupled with rising US Trade Deficit were said to have triggered the downfall. The culmination on Black Monday probably resulted from the perception of an over-extended stock market, the use of program-trading and the psychological phenomenon of everyone dashing to the exits at the same time.
What could be learnt from the stock market crash of 1987 is not to put all your eggs in one basket. If a person had all his retirement funds invested in an Index Fund, he or she would have lost almost a quarter of it in one single day. Unimaginable. One should always diversify the investments.
Stock Market Crash of 2008
Now, this one should be more familiar to you. Hence, summarizing in just a few words. New financial instruments - like CDO's (Collateralized Debt Obligations) and MBS's (Mortgage-Backed Securities) - are always welcome but should be implemented responsibly by financial institutions. The ex-CEO of Bear Stearns has confessed that he didn't know what to do when his firm's MBS's lost value and also about his inability to control overleverage. The stock market crash of 2008 was due to the failure of investment houses that were over-exposed to these complex securities, that began quickly losing their value due to the collapse of the real-estate bubble. Century-old Lehman Brothers and Bear Stearns collapsed in a New York Minute. The rest of the finance and banking industry are being resuscitated by so called Bail Out.
The key takeaway from the stock market crash of 2008, for the average investor, is to fully understand what you're dealing with. If you don't have a clue about a particular type of investment, do not attempt it until you get the lowdown on it.
Learn More about the history and reasons for stock market crash.