The stock market is an exciting place where fortunes are won and lost. During normal trading the index is somewhat slow moving even though individual stocks can loose or gain a loss in a single day. Every so often the stock index will however quickly and dramatically fall. This can wipe out enormous assets in a single day and can be linked to other financial problems and crisis. These quick falls are often referred to as stock market crashes.
The most well known crash is the crash of 1929 but there has been many others in addition to this one, like the 1987 crash, the Nikkei crash in the early 1990s, and the Scandinavian crash of the early 1990s. The 2008 crash is by some analysts comparable to the 1929 due to its scale and implications. Stock markets can sometime have less severe effects on the market as a whole but be devastating for a certain niche, such as the bust of the dot com bubble. Some experts argue that these niche crashes should not be considered stock market crashes.
The stock market is affected both by underlying statistics and facts as well as by psychology, and all these factors will play a role in stock market crashes. Simplified it can be said that the statistics and facts cause crashes but the psychology worsen them and turns a market correction into a crash. In a bull market investors are positive and have high hopes for the future, hence they allow high P/E ratios. When the market climate changes so does the mood of the investors. All of a sudden, they become pessimistic and do not see the same potential in the future. They no longer think the high P/E ratios are justified and hence the valuation can fall more than the change in conditions would warrant all other things being equal.
Wall street crash of 1929
This is considered the most famous crash ever as it started the great depression. The crash took place after a period of rapid growth with new inventions such as the radio, the car and the telephone being brought to the market. In eight years the index climbed from 63.9 in the wake of WWI to 381.2.
The crash started on October 24 (Black Tuesday) and 29 (Black Thursday). The later was the worse of the two days and the index fell 12.8% or 38 points in that day alone. Black Thursday saw a large amount of stocks hit the market as margin calls forced over extended investors to sell stocks which caused prices to fall, which triggered more margin calls, more sell offs and further decline.
By November 11 the index had fallen to 228 which was 40% below its peak, but it would continue to fall and lose a total of 89% before the market stabilized. This crash caused the worst economic crisis in modern history. Industrial Average would lose 89% of its value before finally bottoming out in July 1932.