Why did the stock market crash in 1929?

Answer 1

Why did the stock market crash in 1929?

Why not?
The stock market is like the beach. The waves come and go. And that's the way it is supposed to be. There are small waves and big waves. They are all part of the deal. There's nothing bad or strange about that. The crash of 1929 happened because it was time for it to happen.

Many people want to discover the reason for the crash in order to prevent another crash. There's a good reason for everything, and just because we know what creates waves doesn't mean we can stop them. We just have to deal with them. There are powerful forces in existence that people have absolutely no control over such as the moving of the earth's crust which causes earthquakes, tsunamis, and the heating of the sun which causes global warming, and the shifting of supply and demand which causes stock market crashes. These are forces which we have no control over. We may study them to understand them better, but we cannot control them no matter how hard we try. No government is powerful enough to control mother nature.

Therefore, blaming governments for the crash or blaming banks and people is futility. Whatever we do, history is going to repeat itself. There's always going to be another crash. There'll always be another wave. There'll always be winners and losers ...while life goes on. There's nothing we can do to stop this. The only thing we can do and what we should do is get ready and plan ahead...

Remember, the stock market is a zero-sum game. One man's profit is another man's loss. It would be mathematically impossible for everybody to win all at the same time. When a great many people become instant winners, the stock market lures the crowds, and finally when everybody has invested his last dime in the stock market and no more buyers are left, then the whole thing collapses. The stock market crashes and most people lose everything. That's the way it is.

But there's always a few people who know how to make money while others lose. Such was Jesse Livermore who made $100 million dollars during the crash of 1929. Many people like to blame traders like Jesse Livermore, and they say that he caused the crash. That's nonsense. Jesse Livermore didn't cause that crash. He simply knew that it was coming and knew what to do to profit from it. He knew how to ride the waves.

Answer 2

I will go along with znsp550 pretty much, but he is totally wrong in saying that the stock market is a zero sum game. Poker is a zero sum game. That means that the same amount of money leaves the game as entered. There are winners and losers, but the value of the game did not change. In the stock market this is very demonstrably not so. If it were so, then there would have been a lot of money made by someone in 1929. For every dollar lost by someone, someone else would have won a dollar. There were a lot of losers -- where were the winners? Ditto February 27 this year. Nope, not a zero sum game. Many of the authors of books on the market make the zero sum statement but mathematically they are uniformly wrong.

Answer 3

Basically, there was a "run" on stocks as there was a run on banks. Many investors saw the prices of their stock falling and decided to bail out before they lost more. For every seller there must be a buyer. When sellers outnumbered buyers so heavily, prices fell dramatically. Furthermore, it was possible back then to borrow up to 90% of the purchase price of your stock on a margin loan. When the stock price fell 10%, the lender made a margin call (demanded immediate repayment or reduction of the loan) and when the investor could not reduce the loan out of his pocket, the stock was liquidated in a forced sale to pay the loan. In such a situation the smart money stayed on the sidelines until the freefall was over, so even those with the resources were not willing to buy stocks until they could see that stock prices had bottomed out. I am sure my Finance professors could add to this a bit, but these are some of the basics.

Answer 4

I won't look at the other answers so as to give an honest answer...which leads me into your question. Let's look at Joe Kennedy (father of JFK, Ted etc) as our example. He would spread false rumors about a company to drive the price down, buy a ton of it and then spread more false rumors in the opposite direction just to sell it at a profit. He did this until he became a muti-millionaire before the crash. He was just one of several thousand individuals that did this type of scandulous trading. The impact was that there was no integrity to stock trading itself. There was no trust. But there were no accounting rules either. Cooking the books was a norm which justified the rumors. Banks spread rumors as well causing runs on the banks which, as we know, cripples a bank. Irony? Roosevelt appointed Joe Kennedy to be the first chairman of the SEC. I like this quote "Jerome Frank likened the appointment to "setting a wolf to guard a flock of sheep."

Answer 5

I agree the stock market is not a zero sum game. This is true both in long and short time scale.

1. Over a long period of time if the price curve goes up then your money grows if you are an investor.

2. Over short period of time the statement is not true either.
Suppose at this very moment I sell 100 shares of Suncor (symbol SU at NYSE and TSE) at $90.00 and it such happens that YOU buy these same shares. You do not pay exactly the same amount at which I'm selling them because of the bid-ask spread. You'll probably buy the shares at $90.05. In addition we both pay commissions

So commissions + bid-ask spread make the game not a zero sum.

Answer 6

two words we have all heard before IRRATIONAL EXUBERANCE!!!!!!!!!!!!!!