1929 Stock Market Crash
Some economists believe that the 1929 stock market crash was a major factor in the Great Depression. The 1920s speculative boom led to the collapse of the bubble because of the accumulation of the economy. The formation of the bubble is because in the 1920s, with the stock prices, many people invest in the market. As prices continue to rise, they continue to invest, hoping prices will never rise. Most people borrow money to invest in the market
which lasted until 1929. Then the market began to fall. Most people panic, which leads to a large number of stocks sold. By 1933, stock prices had fallen 80 per cent from their 1929 highs.
This causes people to feel poor. This has led to a reduction in market demand for various products. Companies trying to raise money in the market failed. This leads to a shortage of funds to manufacture products or provide services. The company started laying off their employees because they wanted to reduce production. As you can guess, this led to the Great Depression. This period lasted about 4-5 years until 1934. All this is due to lack of confidence. This is before the confidence of the stock market. This shift in confidence is caused by a negative sentiment in the market.
The 1920s speculative boom was one of the causes of the Great Depression. Speculative boom is due to a large number of market inputs. Significant investments are underway, as most people are trading on margin. Some traders have a profit margin of 90%. Banks also invest in the stock market. When the stock fell, people lost confidence in the entire financial system, leading to hundreds of bank failures. This can be avoided if the banking and stock markets have appropriate regulatory procedures. There should be a limit on the margin you can use for trading.
Needless to say, regulators have learned a lot from this cash. It will take some time before the trust in the financial system comes back. The Federal Government subsequently established the Federal Deposit Insurance Corporation. Because of the existence of the FDIC, the bank may use up its money to repay, but still escapes, because the government repaid the depositors. Now the regulatory rules and procedures are more stringent to prevent the economic collapse, like 1929.
As an investor or trader, you can learn a lot from this crash. In the late 1920s, people began investing and did not do any research on the stocks they bought. At that time, the traders on the floor have more information than the average person trades. This leads to a lack of investor information. Now, because of the Internet and disclosure policies, ordinary investors can have all the information about the company before investing. Good research will give you confidence in your investment and you will not panic when your stock price falls or the general market conditions are poor