What is a stock market crash? What are the definitions and criteria of a crash?

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What is a crash?

Crash means that due to some reason, a large number of securities are sold in the securities market, causing the price of the securities market to fall indefinitely, and it is unknown to what extent it will stop. This phenomenon of large-scale selling of securities is also known as a selling surge.

The world's worst stock market crashes

New York 1929 Crash: Within an hour, 11 speculators committed suicide.

Thursday, October 24, 1929.

The first day of the Great Panic of 1929 also left the deepest imprint of the stock market crash on people.

On that day, 1,289,460 shares changed hands, many of them selling at prices low enough to dash the hopes and dreams of their holders.

But looking back, the disaster happened without even warning. There was nothing noteworthy at the open, and the index was very strong for a while, but trading volume was very heavy.

Suddenly, the stock price began to fall. By 11:00, the stock market was in a frenzy and people were rushing to sell.

By 11:30, the stock market had completely surrendered to blind and ruthless panic and continued to plummet. The trend of suicides began to spread from then on, and within an hour, 11 well-known speculators committed suicide.

In the following days, the New York Stock Exchange ushered in the most difficult period in its 112-year history. The big crash occurred and lasted longer than anything it had experienced before.

As for those speculators who are still alive, the following days will be worse than death. The story before and after the 1929 stock market crash told by Fred Shweder Jr. in "Where Are the Customer's Yachts" became that A classic portrayal of speculators from a period of time.

An investor had a fortune of $7.5 million at the beginning of 1929. He remained rational at first and used 1.5 million of it to buy Liberty Treasury bonds, then gave it to his wife and told her , that will be all the expenses they will need in the future. If one day he asks her for these bonds again, she must not give them to him, because by then he has lost his mind.

At the end of 1929, that day came. He told his wife that a margin call was needed to protect the other $6 million he had invested in the stock market. His wife refused at first, but was eventually convinced. The ending of the story can be imagined, they ended up bankrupt.

In fact, this kind of experience does not only happen to ordinary investors who lack rationality. Even some wise economists have not escaped bad luck. Keynes, the most famous economist of the 20th century, also nearly went bankrupt during this crisis.

Like others, Keynes did not anticipate the Great Crash of 1929 and underestimated the impact of the crisis on the U.S. and world economies. Keynes's accumulated wealth was hit hard by the 1929 crash, leaving him virtually empty-handed.

Later, with his keen judgment, by 1936, he increased his wealth to more than 500,000 pounds (equivalent to 45 million US dollars today) by investing in the stock market. But in the bear market of 1938, his capital shrank by another 62%. Until his death in 1946, the crash of 1929 was an indelible shadow on his mind.

Although the stock market crash initially affected only the wealthy, these individuals are a crucial group whose members control the majority of consumer income and constitute the largest source of personal savings and investments. As a result, the stock market crash caused the U.S. economy to lose the support for spending formed by securities investment profits.

After the stock market crash, the collapse of the holding company system and investment trusts significantly reduced the ability to borrow and the willingness to raise funds for investment, which quickly translated into reduced orders and increased unemployment.

Between September 1929 and January 1933, the average price of 30 Dow Jones industrial stocks fell from an average of $364.9 to $62.7 per share, and the average price of 20 public utility stocks fell from 141.9 to 28. The average price of 20 railroad stocks fell from $180 to $28.1.

Affected by the stock market, financial turmoil also occurs due to the bursting of bubbles. Thousands of banks failed, tens of thousands of businesses closed, and four banking panics occurred in just four years from 1929 to 1933. Although only a limited number of people were directly affected by the collapse of the bubble, banks were unable to avoid the emergence of a large number of bad debts, and problems in the banking system had an indirect impact on everyone.

After the Great Crash, the Great Depression occurred. The Great Depression lasted for 10 years with unprecedented severity. From the peak of the boom in September 1929 to the bottom of the Great Depression in the summer of 1932, the Dow Jones Industrial Average fell from 381 points to 36 points, a 90% shrinkage. By the end of 1933, the U.S. gross national product had barely reached the level of 1929. 1/3. Actual output did not return to 1929 levels until 1937, and then declined rapidly. As late as 1941, output in dollar terms remained below 1929 levels.

From 1930 to 1940, only in 1937 the average number of unemployed people was less than 8 million. In 1933, approximately 13 million people were unemployed, almost 1 in 4 people in the labor force.

What’s more serious is that the stock market crash completely destroyed investor confidence. It was not until 1954 that the U.S. stock market returned to the level of 1929.

1987: The Great Panic Returns

October 19, 1987, was another black memory for American investors. On this day, the U.S. stock market crashed again.

The stock market opened, and the horror that had not been seen for half a century reappeared. In just 3 hours, the Dow Jones Industrial Average fell 508.32 points, or 22.62%.

This means that the stocks in the hands of shareholders have depreciated by more than 20% in one day, and a total of US$500 billion has disappeared, which is equivalent to one-eighth of the annual gross national product of the United States. The property evaporated instantly.

Soon, panic spread to other areas outside the United States. On October 19, stock markets in London, Tokyo, Hong Kong, Paris, Frankfurt, Toronto, Sydney, Wellington and other places also fell.

Over the next week, panic intensified. On October 20, Tokyo Stock Exchange stocks fell by 14.9%, setting a record for the highest decline in Tokyo Securities. On October 26, Hong Kong's Hang Seng Index plummeted 1,126 points, a drop of 33.5%, setting a record for the Hong Kong stock market's historical decline, swallowing up all gains since November 1986. In response, stock markets in Tokyo, Sydney, Bangkok, Singapore and Manila also fell. As a result, the news of the Asian stock market crash spread back to Europe and the United States, causing the European and American stock markets to plummet.

According to statistics, in the eight days from October 19th to 26th, as much as 2 trillion U.S. dollars of wealth were lost due to the plummeting stock market, which is the total direct and indirect losses of 3,380 million U.S. dollars in World War II. 5.92 times of US$100 million. Wachtel, an economist at Merrill Lynch, therefore called the stock market plunge on October 19 and 26 an "out-of-control massacre."

The stock market crashed in October 1987, which first affected the rich. Among the 400 richest people in the United States previously published by Forbes magazine on September 15, 38 names were removed from the list. On October 19, Sam Walton, then the world’s richest man, lost US$2.1 billion and lost his position as the richest man.

What is even more tragic are the ordinary people who have invested their life savings in the stock market. They originally expected to make some money for retirement by taking advantage of the bullishness of the stock market, but in one day their life savings were lost in the falling stock prices. Disappeared without a trace.

The fluctuations in the stock market have just eased, and social and economic life has fallen into panic fluctuations again. Banks went bankrupt, factories closed, companies laid off massive layoffs, and the tragedy that happened in 1929 happened again.

Fortunately compared to 1929, the U.S. economy maintained relatively high growth at that time, and the stock market crash did not lead to an overall economic crisis. However, the stock market crash still had a huge impact on the U.S. economy, which was followed by a long period of stagnation in the U.S. economy.

Japanese stock market nightmare

After the "Black Monday" in the United States on October 17, 1987, the Japanese stock market was the first to recover, and it led to the recovery of global stock markets.

Since then, the Japanese stock market has been on an upward trend, but another nightmare panic is brewing.

In December 1989, when the Tokyo Stock Exchange opened for the last time, the Nikkei Stock Average reached 38,915 points. This was also the last opportunity for investors to make huge profits.

In the 1990s, stock market prices plummeted. By October 1990, the stock index had fallen below 20,000 points. There was a slight recovery in the first half of 1991, but the decline became more severe in the second half of the year. On April 1, 1992, the Nikkei Stock Average in the Tokyo Stock Market fell below 17,000 points, and the Japanese stock market fell into panic. It dropped to 14,309 points on August 18, basically returning to the level of 1985.

So far, the stock index has dropped 63% from its peak, and the total current price of listed stocks has dropped from 630 trillion yen at the end of 1989 to 299 trillion yen, a decrease of 331 trillion yen in three years. The Japanese yen and Japanese stock market bubbles have completely burst.

The consequences of the bursting of the stock market bubble are serious. On the one hand, the securities industry is experiencing an unprecedented depression. In the two years since the stock market crashed in 1991, stock market trading volume has been only 20% of its previous level. More than 200 securities companies, which mainly rely on earning transaction fees to survive, are all unable to make ends meet, and their operating deficits are growing. In 1992, many large companies had deficits of more than 40 billion yen.

In terms of external capital transactions, due to the reduction in external securities transactions and the emergence of long-term capital balance surplus, Japan has dramatically become a major capital importer.

On the other hand, due to the crazy rise in the stock market, companies are attracted to turn to direct financing, and banks are forced to focus on risky companies and non-bank financial institutions as their main financing targets, which indirectly leads to a crisis in the banking industry.

After the bubble burst, Japan's economic situation took a turn for the worse, with equipment investment stagnating, corporate inventories increasing, industrial production declining, and economic growth slowing down.

Even real estate has not been immune to the impact. Japanese real estate prices reached sensational highs in 1990, when the price of a Japanese Imperial Palace plot was equivalent to the price of all real estate in California combined. After the bubble burst, Japan's real estate prices fell by nearly half and have just begun to stabilize, and the entire country's wealth has shrunk by nearly 50%.

The continued rise in asset prices at that time stimulated people's desire to borrow and speculate. The Bank of Japan's eagerness to lend money to real estate developers finally bore a bitter fruit. The bursting of the real estate bubble and the inevitable increase in non-performing loans put a heavy burden on the Bank of Japan, triggering deflation and causing the Japanese economy to experience a longer and more painful depression.

Japan has experienced a long bear market, and even after the 2005 rebound, the Japanese stock market is still 70% away from its all-time high.

China-style stock market crash

Look back to China. Although the development history of China's stock market is relatively short compared with that of Western developed market economy countries, it has still experienced two thrilling stock market crashes.

One incident occurred in 1996. After the National Day in 1996, the stock market was booming across the board. From April 1 to December 9, the Shanghai Composite Index rose by 120%, and the Shenzhen Stock Exchange Component Index rose by 340%. The China Securities Regulatory Commission successively issued various regulations and notices that were later called the "12 gold medals" in an attempt to cool down the market, but the market continued to rise. On December 16, "People's Daily" published a special commentator's article "Correct Understanding of the Current Stock Market", which characterized the stock market: "The surge in the recent period is abnormal and irrational." The rise was finally stopped. The Shanghai Composite Index reached the lower limit at the opening. Except for a few small-cap stocks, the lower limit was closed for the whole day and continued to fall to the lower limit the next day. All the paper wealth of all stockholders three days ago has evaporated.

Another incident occurred in 2001. On July 26 of that year, the reduction of state-owned shares officially began during the issuance of new shares. The stock market plummeted, with the Shanghai Stock Exchange Index falling 32.55 points. By October 19, the Shanghai Stock Exchange Index had plummeted from 2,245 points on June 14 to 1,514 points, with more than 50 stocks falling below their limits. That year, 80% of investors were trapped, the net value of the fund shrank by 40%, and brokerage commission income dropped by 30%.

Compared with foreign stock market crashes, the causes of China's stock market crashes are different, but they all have some similarities: the trend of the stock market is greatly divorced from the fundamentals of the economy, so it is destined to be unsustainable. Then everything collapsed, but people in the stock market had an overly speculative mentality, or they still tried their best to do it when the storm was approaching, or they chased the rise and the fall all based on their feelings, which inevitably ended in misfortune.