The Stock Market Crash
There have been several stock market crashes throughout the history of stock markets, including the events that happened during 1929, 1987, and the bursting of the internet bubble of 2000. The reasons behind each one have been analyzed to have been a bit different each time, although there are similar elements each time. For the 1929 crash, many see the demand that came from the general public towards stocks as one of the reasons why stock prices separated from the values of the companies that the prices represented. That demand was seen as to come from a mass of unsophisticated investors who were thrilled of the idea of participating in the bull market that preceded the crash, with little idea how the underlying businesses should be valued and whether the prices paid corresponded to those valuations. This created a situation where the prices were pushed way beyond reasonable levels, and when the correction towards more realistic levels finally came, the correction in the stock market prices was sudden. As for the 1987 crash, the reasons are often seen as relating to the introduction of computers and program trading. These automated trading programs executed trades automatically, and when in 1987 these programs came to the same selling conditions at the same time, the resulting flood of sell orders resulted in sudden correction in the stock prices. For the stock market crash of 2000, when internet stock prices fell suddenly and continued declining for several years, the reasons are seen in the novelty in the internet sector, which caused a situation where these companies were hard to value, but there was a huge demand to own these stocks, even at prices that had no basis on the underlying financials of the company, only a promise of profits down the line. When the rosy prospects for the internet sector as a whole were taken a second look around the year 2000, the stocks related to the sector crashed, especially in cases where the company had no established underlying method for valuing the stock. What is common for all these events is that there have been elements that have contributed to a large amount of stocks at the same time. For the crashes in 1929 and 2000, the increase in stock prices was build on demand that led to underlying values being disconnected from the prices paid for the companies. As this disconnect became more and more obvious to everyone in both cases, the pressure for a large number of investors to sell their shares at the same time grew with each passing day, similarly to the musical chairs game, where when the music stops, every one scrambles for the available chairs. |