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Causes behind a Stock Market Crash and its Effects on the Society
A stock market crash is not only dramatic but its ripple effects are spectacular. A good example is the 1929 stock market crash that led to the great depression. The Dow Jones industrial average plunged from 381.3 to a low of 41, leading to a huge sell of that offset the depression. This drop happened only for four days but its effects were felt for years and years after. For example, it took 25 years for the Dow Jones index to get back to the high point of 381.2.
In the period of four days that the Dow Jones dropped 25%, the stock market lost a record 30 billion, valued to 396 billion worth today. In the early twenties, people had started to invest in frenzy, and the economy was growing at a rate of 20% per year. When black Thursday came, in octob4er 24 1929, the stocks fell a whole 11% within a single day. This caused panicked investors to sell their stocks in an effort to recover their investments. By black Tuesday the harm had already been done and the stock market was just pandemonium.
The effects of the market crash were devastating to everyone in the United States. People who were owed money and banks started calling in debts, causing people to sell off their property to offset debts. The great depression was one of the most terrible periods in history because the economic growth dropped by 50%, and unemployment reached a new high of 25%.this is a classic example of the effects of a stock market crash and what it does to the society as a whole. The effects were not only felt in the United States but the whole world as world trade fell by 62% during this time. Some causes for a stock market crash could be:
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Overtrading;Usually, when a market reaches an all time high, everyone is scared of the aftermath. This is because a mighty clash is inevitable. People sell their invested stocks in a panic when the market shows signs of failure because they do not want to lose their money.
Demand and supply dynamics; People tend to by what others are buying and they follow trends. A decline in buying of stocks may cause a huge stock market crash and this is why the media could have such a huge effect on the stock market. When people buy or sell stocks in a panic, there is bound to be consequences in the near future. This is because the market will struggle to find balance in its own way.
Too much borrowing and lending;In an attempt to invest in large quantities, people over borrowed from the banks in the 1920s. When the stock market crashed, this money was never to be recovered and the banks lost huge amounts of it. This was a huge blow to the economy. Too much lending in part led to people over purchasing stocks, which was what really caused the stock market crash. The amount of risk taken overweighed the benefits to be accrued from the markets and people were relying in a pipe dream.
Posted by Michael Bengan in Business & Finance, Stocks
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