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Why Stock Markets Crash

Rae Hall By Rae Hall on
Badge: Advisor | Level: 18 | Finances Expertise:
Stock Markets Finances Why Articles

What causes the stock market to fall or crash? There can be a number of reasons. Every time you watch the financial news you will see reporters saying “Let’s see how the stock market responds to this event”. The reason they say this is because several factors can cause a stock market to fluctuate. You can bet if the Federal Reserve Chairman speaks you will see the stock market respond. If a large company releases reports on how they are doing financially, you will see the market fluctuate.

The crash of 1929 came after a decade-long period of great innovation and a good housing market. People heard money could be made in the stock market so they invested heavily in the stock market. Like the crash of 2008, there were problems with some failing financial institutions during the crash of 1929. As people got out of the market other investors watched as the media began to report on Black Thursday, causing people to panic. The market crashed on the following Tuesday, which is now known as Black Tuesday. This would be the beginning, but not be the sole cause, of The Great Depression.

Another stock market crash took place in 2008. During the first week of October 2008, the stock market had fallen each day. However, on October 6, 2008, the stock market fell by 1, 874 points. This is equivalent to about 18%. In 2008, the market news for investors had been bad all year. The months leading up to the crash of 2008 had been a good time for anyone wanting a new home. Financial institutions were more than happy to loan money to homebuyers because in a good housing market, even if the borrower can not pay for the home, the bank will take the home back and sell it again. However, these financial institutions failed to see the coming slump in the housing market. Instead, they witnessed financial institutions, like Bear Stearns, fail only to be purchased by rival financial institutions at a smaller price than the failing lending institutions were worth. Bear Stearns was not the only ones to suffer. FreddieMac and Fannie Mae would also have financial problems during this period. The government tried to help these institutions, only to see our national debt skyrocket. This caused investors to grow worried. Any time the investors worry the stock market suffers.

If the job market is bad, and unemployment is up, people will not invest in the stock market as much. Politics or political races can affect the market. As of today, July 1, 2010, the stock market is on it's 6th day of falling due to the housing market and economy.

It would seem that there is a cycle in our economy where we have good times and then the eventual fall so if you play the market do your research. They are many good sites on the internet for these purposes such as The Motley Fool.