These two words are enough to send a chilling sensation to the spine of every investor and trader. If you are a new investor with little knowledge of the history of the US stock market, here is an important definition for you.
According to Investopedia.com, Black Tuesday is defined as:
“October 29, 1929, when the DJIA fell 12% – one of the largest one-day drops in stock market history. More than 16 million shares were traded in a panic selloff.”
After the stock market crash in 1929, the fourth day of the crash signalled the great depression of 1929 that lasted for a decade. Before this period, the Stock market lost nearly 40 percent of its wealth within 8 weeks i.e. September and October, 1929. In short, Black Tuesday triggered a chain of financial disasters for the next 10 years to come.
Investors lost their trust in the U.S. Financial system despite of the efforts made by major financial institutions including Morgan Bank, National City Bank of New York, and Chase National Bank. Most of the small scale banks failed during this period and most of the businesses closed because of no credit. It was a time when the national income of the United States of America fell in a devastative manner.
Black Tuesday: Why did it happen?
Some primary factors lead to the Black Tuesday. There is a difference in opinion and most of the experts have agreed to two potential reasons.
- Panic driven stock market (No information on stock prices lead to panic): The stock market was a lot different in the 1920s and stock prices were released on ticker-tapes for investors, buyers, and sellers. Without proper information about the fall in prices, most of the investors panicked and liquefied their investments to stop loss. A record 16 million shares were sold on October 29th, 1929. It was the day when police was deployed to control crowd surrounding the New York Stock Exchange.
- Buying on Margin (Using credit to buy stocks): Around that period, the trend of buying on margin was quite fashionable among the investors. In simple words, investors borrowed money from their brokers to purchase stocks. After the stock market crash, brokers recollected their loans and most of the investors lost their whole life’s savings. The Black Tuesday lead to several cases of suicide in the investor community.
There are several other explanations including the Smoot-Hawley Tariff Act, which lead to market instability because of extraordinary import taxes. Some experts even believe that the dramatic increase in the discounted rate offered by the Bank of England were responsible for the market crash.
Events that Black Tuesday Triggered
- Investors lost their trust in the U.S. Financial System
- Investors put their money on gold leading to an unnatural increase in the prices of gold
- 20,000 companies went bankrupt after the market crash
- Nearly 1616 banks went out of business
- 12 million people lost their jobs
- Great Depression: 50% drop in economic growth, unemployment touched 25%, 42% fall in wages
What do we learn from Market Crashes?
Financial tragedies and market crashes seem to happen in every few years and it is important to educate yourself about these market slumps. One of the common reasons that lead to market volatility is lack of knowledge about the stock market and the market position of the company. Investors often inflate the price of stocks by investing without estimating the real value of the company.
Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.
By George Soros
Most of the stock market crashes happen after a sky-rocketing share prices. Most of the investors follow the get-rich-quick approach and end up losing their money in the market. Investments with large returns pose even bigger risks for the investors. While considering the history of the US stock markets, it is quite evident that market crashes are bound to happen. The best approach is to be educated and capable enough to identify such market trends and avoid investing during that period.