The same rules also apply to the stock market. Whether stock prices rise for a few months or a few years straight, they always come down. The higher they rise, the harder they fall.

The best-known example of a market crash occurred in 1929. On October 29, a day now called "Black Tuesday," the New York Stock Exchange (NYSE) lost one-third of its entire value. More money was lost during that one day than ever before. Stocks hit rock-bottom and thousands of people were wiped out.

Now, I'm hardly an expert on the stock exchange. It's kind of like the weather - no matter how many predictions people make, in the end, it does its own thing. As with a hurricane or tropical storm, when the market crashes, all we can do is brace ourselves and hope that we survive.

When the end finally comes, everyone stands around offering opinions on what really happened.

After the stock market crashed in '29, many people tried to explain it. I spent a few days in New York reading up on some of them, talking to experts and visiting the NYSE itself.

During the '20s, the economy was booming - people were making and spending a lot of money. People started investing their life-savings, mortgaging their homes, and cashing in safer investments to try their luck on the stock market. The idea of buying on margins came out of that. Buying on margins means buying many shares of stock with a very small amount of your own money - as little as 3% -- and borrowing the rest from a broker. The idea was to buy a large quantity of stock which you expected to have a large increase in value - enough to cover the amount borrowed from the broker, plus profit. It was very risky because the stock needed to increase in value enough to cover the broker's loan in order for you not to lose money.

The thing is, stock prices are supposed to reflect a company's overall performance, and not just how much stock the company is selling.

Back in 1929, however, stocks were going up because people put a lot of money into the market, not because companies were doing well. Stock prices rose quickly. People began to think that the market would crash soon.

Although some government officials knew what was about to happen, nobody did anything. In fact, by late March '29, the Federal Reserve was meeting behind closed doors everyday to try for a solution. But there was none.

On Thursday, October 24, 1929, the bottom began to fall out. Prices dropped as investors tried to sell off their holdings. By the end of the day the NYSE had lost $4 billion. On Monday, people began to really panic. On "Black Tuesday," prices fell even more. Between October 29 and November 13 (when stock prices hit their lowest point), over $30 billion disappeared from the economy.

People were so scared that all they wanted to was sell their stocks and cut their losses.

The volume of trade on "Black Tuesday" was so enormous that the ticker tape machine couldn't keep up. Investors panicked even more when they couldn't figure out the exact stock prices, which in turn generated more sales, which slowed down the ticker tape even more!

It got worse when banks started to shut down. Customers feared that if they didn't withdraw all their money, they would lose it if their banks were to fail. Well, when they withdrew all their money, guess what happened? The banks failed - 4,000 in all!

It took many years to clean up the fall-out of the crash. Americans did not trust the market anymore. The government realized that to restore faith, it needed to have some control over things. In 1934, it started the Securities and Exchange Commission (SEC). The SEC helps people who might want to buy stock figure out how a company is doing.

I talked to a man who is a member of the NYSE (a member is a person who can buy and sell stocks). He told me that the market is much safer for people to invest in now.

But he still couldn't tell me what the market will do next. When I asked him for a thumbs-up or down, he shook his head and shrugged his shoulders. And when I asked him if the crash of '29 could conceivably occur again, he didn't know.

Who knows what will happen next? I sure don't!

References:
1. http://sac.uky.edu/~msunde00/hon202/p4/nyt.html
2. http://www.arts.unimelb.edu.au/amu/ucr/student/1997/Yee/1929.htm
3. http://www.gainesvillesun.com/news/articles/10-29-99g.shtml
4. http://mypage.direct.ca/r/rsavill/Thecrash.html

Daphne

Please email me at: daphne@ustrek.org