Stock Market Crash – How does a Stock Market Crash?
The most celebrated crash, the Stock-Market-Crash-of-1929, commenced on October 24, 1929. There was also a break apart or “adjustment” on Monday October 19, 1987.
When a stock market crashes, this means that a stock index (fts, nasdaq etc) has fell a considerable amount.
How does this happen? In the short term it is a confidence crisis. Loads of people own shares in Towles PLC, which trade at 1 pound.
For some reason or another, either speculative or otherwise, market participants and share holders decide that the company is in terrible shape and the stock is worth noway near 1 pound. Obviously, the shareholders are going to want to sell their shares and quick.
Lets say I have 100 shares and I want to sell them quickly, I must advertise this on the stock market. I call my broker and tell him that I want to sell the shares I have for 95 pence (I am willing to take a small loss because I think the shares will plummet further). He agrees and the offer is placed publically.
In order for me to sell the shares, I have to find someone to buy them, but because everyone believes the stock is worthless they are not going to buy for 95 pence (even though it was worth 1 pound).
As a result, I must lower my asking price to 90 pence ..80 pence….70 pence UNTIL I HAVE FOUND SOMEONE WHO IS WILLING TO PAY THE CASH.
Now imagine the same thing is occurring with all the shareholders, in all firms – STOCK MARKET CRASH