Stock Markets Exposed

What were some major and minor causes of the Great Stock Market Crash?

I can only think of one and still don't know how to explain it very well.

Public Comments

1. Overproduction - Farmers had been producing more goods than they could sell, and so the prices of everything fell. On top of that, everyone was desperately trying to sell their stocks, and no one would buy. Plus, tons of banks went into bankruptcy, and closed down, causing the thousands of people with money in them to lose everything.
2. 1. overspeculation. Margin was minimal and leverage was high. That is, a little money could buy a lot of stock. Once the market started to drop, margin calls were sent out, and if the stock ownder didn't put up more money, the stock would be sold to meet the margin call. With so many sellers, the downward spiral only got worse. 2. The government didn't intervene in a meaningful way. Nowadays there are "circuit-brakers" which help keep a market from falling. These stop all action until a period of time has passed. 3. Stock was owned by many gullible investors who knew nothing about the markets and only thought the market could go one way--up. 4. People didn't assess a stock according to value. People didn't try to determine what a company was worth. They were only interested in the stock price. 5. Brokerage houses made no attempt to assess the credit-worthiness of stock buyers. Now adays more info is taken of a potential client. And nowadays a daytrader has to have 25 thousand dollars in an account, whereas back then there were no such rules. Even the boot black owned stock. In fact, legend had it that one of the big stock investors--perhaps it was Joseph Kennedy, perhaps JP Morgan--got out of the market because he heard his boot black (shoeshine boy) making stock tips. 6. Markets could be manipulated, and were. Backroom deals by so-called "plungers" meant that stocks transactions were rigged. There would be agreements to take a stock up, and to take a stock down. 7. There was mu;ch less openess concerning stock transactions than you see today. Companies' balance sheets were not as open. That's one problem with investing in China and other emerging markets today--the lack of open accounting so that a company's books can be properly analyzed.
3. If you're talking about the "crash" in 1929, that really was the point at which the Great Depression took off, then it's a combination of factors. First, there was little or no regulation of the stock and commodities markets - which meant that people engaged in all **sorts** of risky (and sometimes illegal) behavior when trading. By far the greatest threat came from "Margin Trades", which were trades that took place without any money being paid up-front. Think of it this way: today, if you want to buy stock, you call a broker (or go online), place your order, and pay for your shares. Prior to 1929, however, it was not uncommon for even the **average Joe** to be buying stock "on margin", where they placed an order, and paid for it after selling it off at a later point. It allowed for all kinds of business on Wall Street, but when things tanked, there was a TON of debt out there that couldn't be recovered...which caused the markets to crash even harder. Perhaps the most telling comment about this type of trade was made by Joseph Kennedy, Sr., who sold off all his stocks and commodities just prior to the crash. When asked, he said that he had found himself listening to his driver talking about his (the driver's) investments, and if just anybody could buy stocks, it was too risky for him. And that was the problem: ANYBODY could buy stocks...and they did. So the crash in the markets really got things going, but that wasn't the only cause. The crash got people panicked, and that led to what's known as a "run" on many banks - people withdrew their money, which caused the banks to collapse. Keep in mind that when you make a deposit at the bank, they don't just put your money in a vault and have it sit there. Instead, they take the majority of your deposited funds and invest it - they need to make money to pay the interest on your account, after all - and these investments take time to mature. So when all these customers started withdrawing their $$, the banks had to try and come up with funds that were invested elsewhere...and in many cases had been invested in stocks that had tanked. Once a significant number of banks went under, things just got worse. Without strong financial footing, big business couldn't invest in expansion - in fact, many were struggling just to stay in business - and people lost jobs as budgets were trimmed. Without jobs, people found their homes being foreclosed on, and this caused even more hardship and difficulty for the population. It was only through a concerted effort by the government (as well as the onset of World War II) that the economic situation was reversed...hey, war is big business! Hope this helps.