Stock Market Crash of 1929

(noun)

The Wall Street Crash of 1929 was the most devastating stock market crash in the history of the United States. It was the result of rampant speculation and increased credit extensions in the booming economy of the Hoover administration.

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Examples of Stock Market Crash of 1929 in the following topics:

  • Wall Street Crash of 1929

    • The Wall Street Crash of 1929, also known as the Great Crash and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout.
    • The crash followed a speculative boom that had taken hold in the late 1920s, which had led hundreds of thousands of Americans to invest heavily in the stock market.
    • After the experience of the 1929 crash, stock markets around the world instituted measures to suspend trading in the event of rapid declines, claiming that the measures would prevent such panic sales.
    • Also, the uptick rule, which "allowed short selling only when the last tick in a stock's price was positive" was implemented after the 1929 market crash to prevent short sellers from driving the price of a stock down in a bear run.
    • The trading floor of the New York Stock Exchange in 1930, just six months after the crash of 1929.

  • The Regulators

    • The Securities and Exchange Commission (SEC), which was created in 1934, is the principal regulator of securities markets in the United States.
    • Before 1929, individual states regulated securities activities.
    • But the stock market crash of 1929, which triggered the Great Depression, showed that arrangement to be inadequate.
    • The SEC also oversees trading in stocks and administers rules designed to prevent price manipulation; to that end, brokers and dealers in the over-the-counter market and the stock exchanges must register with the SEC.
    • The Commodity Futures Trading Commission oversees the futures markets.

  • The Great Depression

    • The Great Depression was a decade-long period of poverty and unemployment that followed the 1929 stock market crash.
    • Economists still dispute how much weight to give the stock market crash of October 1929 as a cause of the Great Depression.
    • Many academics see the Wall Street Crash of 1929 as part of a historical process called boom and bust.
    • The net effect of the 1929 stock market crash was a sudden and general loss of confidence in the country's economic future.
    • A crowd gathers on Wall Street following the stock market crash on October 29, 1929.

  • Market Strategies

    • In the short term, stock prices can be quite volatile, and impatient investors who sell during periods of market decline easily can suffer losses.
    • According to Lynch, investors had to wait 15 years after the stock market crash of 1929 to see their holdings regain their lost value.
    • Another group of speculators are known as "short sellers. " They expect the price of a particular stock to fall, so they sell shares borrowed from their broker, hoping to profit by replacing the stocks later with shares purchased on the open market at a lower price.
    • While this approach offers an opportunity for gains in a bear market, it is one of the riskiest ways to trade stocks.
    • If the market price rises, the trader can exercise the option, making a big profit by then selling the shares at the higher market price (alternatively, the trader can sell the option itself, which will have risen in value as the price of the underlying stock has gone up).

  • Securities Market Institutions

    • Investors can buy or sell corporate stock through organized exchanges.Exchanges are secondary markets, and they increase the liquidity of securities.We define organized exchanges as either an exchange or over-the-counter market.An exchange has a physical location, and buyers and sellers of securities meet face to face.Only members, called specialist, can enter these exchanges.For example, if you want to buy Coca-Cola stock, you must contact a brokerwho contacts a specialist at the New York Stock Exchange.Subsequently, the specialist matches prices and quantity of stock for buyers and sellers.Consequently, the broker and specialist earn commission from each transaction.Oldest and largest U.S. corporations are listed on the New York Stock Exchange, while unknown corporations are listed on American Stock Exchange.
    • Financial analysts compile market indices that measure broad movements in a financial market.Most popular and the oldest stock market index used today is the Dow Jones Industrial Averages, otherwise known simply as the "Dow" or "the industrials. " The Wall Street Journal invented the Dow in 1882, and it calculates the Dow by a weighted average of 30 representative stocks of New York Stock Exchange.The Dow includes Coca-Cola, IBM, Proctor & Gamble, and Exxon.Analysts at the Wall Street Journal adjust the Dow for corporate mergers, corporate bankruptcies, and stock splits.Another popular market index is Standard and Poor's 500 (S&P 500).Standard & Poor's index includes 500 stocks that are listed on the Stock Market Exchange.We list the major stock exchanges in the world in Table 1 along with their market indices.
    • A stock market, occasionally, experiences a rapid drop in stock prices, which precipitate a stock market crash.A stock market crash means a dramatic drop in stock prices during a short time period.Unfortunately, a stock market crash bankrupts investment companies, insurance companies, pension funds, and commercial banks.Although commercial banks are not directly involved with the stock market, they may have granted loans to investors who cannot repay.Finally, a stock market crash in one market can trigger another stock market crash, even a stock market located in a foreign country.
    • Stock market crash became the prelude to the Great Depression.In 1929, the stock market crashed on October 24, October 28, and October 29.Afterwards, the unemployment rate peaked at 26% in the United States.Moreover, the New York Stock Exchange crashed on October 19, 1987.The Dow Jones fell by 508 points (or 27.8%) in one day, the largest loss in U.S. history.However, the United States did not enter a recession because the Federal Reserve came to the rescue, providing emergency loans to the financial institutions.Then the United States experienced a stock market crash in March 2000, which triggered the 2001 Recession.Many people call this the dot-com crash because stock value for many internet companies became worthless overnight.Finally, the U.S. experienced the 2007 Great Recession, which became the most severe recession since the Great Depression.Your author calls this the 2008 Financial Crisis, when pandemonium struck the financial world.
    • When investors see the Dow Jones soaring, they invest more money into the stock market.As investors dump more money into the stock market, the stock prices continue rising.If investors see the stock market prices began falling, then they pull their money out of the stock market, and stock prices continue falling.If stockholders become afraid, they cash in all their stocks at once, causing thestock prices to plummet.Thus, the market moves in cycles, being driven by public's psychology and their expectations about future stock prices.

  • "Black Monday" and the Long Bull Market

    • On Monday, October 19, 1987, the value of stocks plummeted on markets around the world.
    • The Dow Jones Industrial Average fell 22 percent to close at 1738.42, the largest one-day decline since 1914, eclipsing even the famous October 1929 market crash.
    • Partly as a result, the crash of 1987 was quickly erased as the market surged to new highs.
    • In early 1999, 13 percent of all stock trades by individuals and 25 percent of individual transactions in securities of all kinds were occurring over the Internet.
    • But by then, the market had climbed so high that the declines amounted to only about 7 percent of the overall value of stocks, and investors stayed in the market, which quickly rebounded.

  • Historical Returns: Market Variability and Volatility

    • Historical analysis of markets and of specific securities is a useful tool for investors, but it does not predict the future of the market.
    • However, an investor who looked at this graph in early 1929 and made the decision to invest because s/he would be guaranteed to make money was in for a shock when the market crashed in October 29, 1929.
    • Macroeconomic forces, such as the Great Depression, affect the entire stock market and can't be predicted from past market performance.
    • These types of interlinkages are a cause of the overall market variability and volatility.
    • Markets and stocks are affected by many factors beyond the information in their financial statements and past performance.

  • Causes of Banking Crises

    • In light of recent market and banking failures, the economic analysis of banking crises both historically and presently is a constant source of interest and speculation.
    • Stock Market Positive Feedback Loops: One particularly interesting cause of banking disasters is a similar positive feedback loop effect in the stock markets, which was a much more dynamic factor in more recent banking crises (i.e. 2007-2009 sub-prime mortgage disaster).
    • This can create dramatic rises and falls (bubbles and crashes), which in turn can throw banks with poorly designed leverage into huge losses.
    • The Great Depression highlights how bank runs caused a banking crisis, which ultimately became a global economic crisis.The Great Depression in 1929 resulted from a variety of complex inputs, but the turning point came in the form of a mass stock market crash (Black Tuesday) and subsequent bank runs.
    • As the market falls, investors create a positive feedback loop and self-fulfilling prophecy due to a lack of confidence that drives it down even further.

  • Answers to Chapter 5 Questions

    • The Dow Jones Average is an average of the top, blue-chip stocks on the New York Stock Exchange.
    • However, a market index shows a trend of stock prices.
    • A stock market crash occurs when stock prices reach a peak and quickly plummet.
    • Thus, a stock market crash could lead to a financial crisis.
    • The French students only lose the value of their time at the university.

  • Types of Risk

    • There are many types of financial risk, including asset-backed, prepayment, interest rate, credit, liquidity, market, operational, foreign, and model risk.
    • Some investments (i.e. stocks) can be sold immediately at the current market rate and others (i.e. houses) are subject to a much higher degree of liquidity risk.
    • Market risk is the term associated with the risk of losing value in an investment will lose value because of a decline in the market.
    • A recent phenomenon that applies the concepts of these risks and how they interact with each other happened in 2008 when the housing market crashed.
    • After a few vehicles broke down, no one wanted to buy them, leading to the worst crash across world markets since 1929.