Definition: The stock market crash of 1929 was the worst crash in U.S. history. By Friday, the situation was so out of control that the decision was made to close down the stock market. Eventually dreams and reality have to be reconciled, and that means some kind of crash. Though the market ended on a positive note on Thursday, there was still some panic among the people. The value of the shares is strengthened further by stock splits and as icing on the cake this value of the shares was enlarged again in the Dow Jones Index, because behind the scenes the formula of the Dow Jones was adjusted due to stock splits.
Generally speaking, crashes usually occur under the following conditionscitation needed: a prolonged period of rising stock prices and excessive economic optimism, a market where Price to Earnings ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants.
The usual economic factors which result in crashes include a long-standing time period of rising stock prices, a market with a higher-than-average price-to-earnings ratio and the wide use of margin debt and leverage. The Great Crash and the Great Depression clearly exhibited the frailties and dangers of a totally laissez faire economy. After this dismal week, prices continued to fall, wiping out an estimated $30 billion in stock values by mid-November 1929.
Demand for goods declined because people felt poor because of their losses in the stock market. Bear markets are a period where declining stock prices occur over a period of time, sometimes months or years. The New York Stock Exchange also make sure that this would never happen again by implementing the uptick rule. The average NYSE trading volume in period from the middle of September 2007 until now is about 7 billion shares per day. They have happened in every part of the world where there was an industrialized market economy.
One of the biggest problems during the boom time of the stock market is that brokers were so confident that stocks were going to keep going up that they were allowing investors to buy stock on margin. Sooner or later the investor that left the market in the result of the recent crash will come back and start to inject funds into the stocks. For example, many cite the September 1929 passage of the Smoot-Hawley Tariff Act, which placed high taxes on many imported items, as a major contributor to the market’s instability. After the crash the New York Stock Exchange then implemented rules to limit the amount that a broker can lend to an investor on margin.