Crashing Markets and What Went Wrong

by Leslie Walker One of the most influential platforms in America is the stock market. Available to any and everyone, the stock market is the place where people can buy and sell stock, or ownership of a company. As a company grows using the money people have invested, the investors’ money grows as well, benefiting everyone. But as fun as jumping in and investing may sound, the stock market can be a tricky place and you have to be careful- especially since the stock market can crash. Here are a few examples of these crashes and the main factors that played a role. The Great Depression of 1929 was one of the largest economic crashes in the U.S, since the Dow Jones Industrial Average (a platform for trading stocks) dropped 24.8% by October 29th, 1929, according to Kimberly Amadeo, an economic analyst and writer for The Balance. Among the reasons, speculation had a great effect. In simple terms relative to the crash, speculation showed that businesses were selling products, but it didn’t show that these products hadn’t been paid in full. “The use of installment plans [like a phone plan or lay-a-away] and buying stock on the margin [borrowing money to purchase a stock] gave a false impression that businesses were more successful and had more cash on hand than what was the reality. This perception of success without firm evidence (cash) was speculation. When investors realized the discrepancy between recorded sales vs. cash on hand there was widespread panic, leading to the Stock Market Crash,” says Jimini Ofori-Amoah, an AP U.S. History teacher at Walter Payton. Speculation is still used and can be very helpful when analyzing what stocks to buy, but it can also lead to misinterpretations if not analyzed correctly. The Stock Market Crash of 2020 has also occurred, (but fear not, although it’s bad it’s not as bad as the Great Depression). One of the biggest reasons has been due to the outbreak of COVID-19, which has shocked and scared many people. This surge of emotion has led many investors to take their money out of the market, causing it to plummet. “Most recessions are caused by financial issues or the natural business cycle,” says Anthony Ryan, a Proprietary Commodity Options Broker. With any short term movement, emotion is usually the reason why because many people tend to ditch their reasoning with impulsive decisions; And if many people are taking out their money, others will follow suit to ensure they evade a loss as well. “People who are worried about getting sick from certain activities or are concerned with their financial futures are not spending money as they normally would,” Ryan explains. Due to these factors, as of March 15, 2020, stock indexes like Dow have dropped 12.9%, according to Fred Imbert, a reporter for NBC. These trends are something to stay aware of; Whether it is an overflow of products or the next outbreak, the stock market is an ever-changing platform that can benefit you or leave you penniless.

©2020 by On the Money Magazine Online

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