Stock Market For 5 Major Reasons example essay topic

1929 Stock Market Crash By: Crystal In early 1928 the Dow Jones Average went from a low of 191 to a high of 300 in December of 1928 and peaked at 381 in September of 1929.1929... ) It was anticipated that the increases in earnings and dividends would continue. (1929... ) Price to earnings ratio's rose from 10 to 12 to 20 and higher for the market's favorite stocks. (1929... ) Observers believed that stock market prices in the first 6 months of 1929 were high, while others saw them to be cheap.

(1929... ) On October 3rd, the Dow Jones Average began to drop, declining through out the week of October 14th. (1929... ) On the night of Monday, October 21st, 1929, margin calls were heavy and Dutch and German calls came in to sell overnight for the Tuesday morning opening. (1929... ) On Tuesday morning, out of town banks and corporations called in $150 million of call loans, and Wall Street was in a panic before the New York Stock Exchange opened.

(1929... ) On Thursday, October 24th, 1929, people began to sell their stocks as fast as they could., sell orders flooded market exchanges. (1929... ) This day became known as Black Thursday.

(Black Thursday... ) On a normal day, only 750-800 members of the New York Stock Exchange started the exchange. (1929... ) There were 1100 members on the floor for the morning opening.

(1929... ) Furthermore, the exchange directed all employees to be on the floor since there were numerous margin calls and sell orders placed overnight, extra telephone staff was arranged at the member's boxes around the floor. (1929... ) The Dow Jones Average closed at 299 that day. (1929... ) On Tuesday, October 29th, 1929, the crash began.

(1929... ) Within the first few hours, the price fell so far as to wipe out all gains that had been made the entire previous year. (1929... ) This day the Dow Jones Average would close at 230.

(1929... ) Between October 29th, and November 13 over 30 billion dollars disappeared from the American economy. (1929... ) It took nearly 25 years for many of the stocks to recover. (1929... ) By mid November, the value of the New York Stock Exchange listings had dropped over 40%, a loss of $26 billion.

(1929-1931) At one point in the crash tickers were 68 minutes behind. (1929-1931) An average of about $50,000,000 was wiped out in a minute on the exchange. (1929-1931) A few investors that lost all of their money jumped to their deaths from office buildings. Others gathered in the streets outside the Stock Exchange to learn how much they lost. (Black Thursday...

) The Cause There are five proposed reason's why the stock market crashed. On of the reasons was that stocks were overpriced and the crash brought the share prices back to a normal level. Some studies using standard measures of stock value, such as Price / Earning ratios and Price / Dividend ratios, argue that the share prices weren't too high. Another reason is that there was massive frauds and illegal activity. However, evidence revealed that there was probably very little actual insider trading or illegal manipulation. (1929...

) Margin buying is another reason that people believed that the crash happened. Though it is not the main reason, there was very little margin outstanding relative to the value of the market. The new President of the Federal Reserve Board, Adolph Miller, tightened the monetary policy and set out to lower the stock prices since he perceived that speculation led stocks to be overpriced, causing damage to the economy. Also, in the beginning of 1929, the interest rate charged on broker loans rose tremendously.

This policy reduced the amount of broker loans that originated from banks and lowered the liquidity of non-financial and other corporations that financed brokers and dealers. Lastly, many public officials commented that the stock price was too high. Herbert Hoover publicly stated that stocks were overvalued and that speculation hurt the economy. Hoover's statement suggested to the public the lengths he was willing to go to control the stock market. These kinds of statements encouraged investors to believe that the market would continue to be strong, which could be one of the causes of the crash.

(1929... ) The Crash and The Depression After the crash, production fell nearly 50% from the business cycle peak in August 1929 to March 1933. Meanwhile, the overall price level dropped by about 1/3. Many people blamed the crash for the economical collapse. Some people held responsible were President Hoover, brokers, bankers, and businessmen. The cause of the depression cannot be linked to one individual or even a group of people.

It is also unlikely that the crash of the market would have been large enough to lead the US economy into the depression and to sustain the downward spiral in business activity. (1929... ) Why People Invested in the Stock Market During 1929, people invested in the stock market for 5 major reasons. The first was that the market was considered an easy way to get rich, quick.

Although, about 4 million Americans, a small amount, invested in the stock market at one time. The constant influx of new investors coming in and old investors moving out ensured that new money was always flowing around. (1929... ) Another reason was higher wages. This meant that everyone in America had extra money to put into savings or invest in the market. The 3rd reason was that at this time, money was made more readily available, from banks, at a lower interest rate to more people.

Some economist debated that this influenced the stock market, it is conceivable that people took loans to buy more stock. (1929... ) The fourth reason is that industry was over-producing, in anticipation of selling the surplus. Profits were put right back into the industry, by investing in factories, new machinery, and more people. This led to even more surplus. An aura of financial soundness was created by this, and Americans were encouraged to buy more stock.

(1929... ) Lastly, there were no guidelines or laws concerning the market. Investors began buying on 'margin' or buying stock on credit. Investors has high expectations that they would receive large returns in a few months, so they could pay the balance and have money left over in return. In reality, most of the money that was being invested in the market wasn't really there.

(1929... ) Government Reaction After the crash there was criticism of the Federal Reserve policy. Between October 1929 and February 1930 the interest rate was lowered from 6% to 4%, and the money supply increased immediately after the crash. Commercial banks in New York made loans to security brokers and dealers, which in turn provided liquidity to the non-financial and other corporations that financed brokers and dealers prior to the crash.

(1929... ) Momentary policy became ambiguous during February 1930 and 1932. Government security purchases in the open market continued to decline until 1932. This reduced liquidity by lowering non-borrowed reserves.

Although, the interest rate was reduced between March 1930 and September 1931, it was raised twice in late 1931. This made loans more expensive and deterred people and corporations from borrowing. (1929... ) Government Regulations After the Crash Before the crash investors were not protected at all from fraud, hype and shoddy stocks.

Investors didn't know if a company actually doing as well as it was said to be doing and if the financial reports were reliable. After the crash, the Securities and Exchange Commission (SEC) was established to law down the law and to punish those who violated. (1929... ) Also during the crash 4,000 banks failed, for the simple fact that the banks ran out of money. Four years later, congress passed the Glass-Steagall Act, which essentially banned any connection between commercial banks and investment banking, to ensure that is would never happen again.

The Federal Reserve and other banking regulators have softened some of the Act's separation of securities and banking functions by letting banks sell certain securities through affiliated companies. (1929... )

Bibliography

1. c Black Thursday: The 1929 Stock Market Crash.
web 2.1929 Stock Market Crash.
web 3.1929-1931.