Definition
The Stock Market Crash in 1987, often referred to as “Black Monday,” was a severe, rapid, and unanticipated global market collapse that occurred on October 19, 1987. It resulted in a record one-day percentage decline in the Dow Jones Industrial Average, which fell by about 22%. The cause of this crash remains debated but high-frequency trading and program trading were often blamed for exacerbating or even starting the event.
Key Takeaways
- The Stock Market Crash in 1987, also known as Black Monday, was one of the most severe single-day crashes in U.S. market history where the Dow Jones Industrial Average (DJIA) fell 22.6% in a single trading day.
- The exact cause of the crash is still debated amongst economists and scholars; However, the popular consensus implicates the advent of computerized trading and derivative securities that made trades quicker and more complex. This appeared to exacerbate the panic selling once it commenced.
- The crash provoked widespread fears of a knock-on impact to the real economy and led to immediate calls for increased regulation. However, markets quickly recovered, and the event didn’t trigger a U.S. recession like crashes in 1929 and 2008.
Importance
The Stock Market Crash in 1987, also known as Black Monday, holds significant importance in financial history due to the abrupt and severe downturn of global stock markets that took place on October 19, 1987.
This event is considered one of the most drastic one-day declines in U.S.
stock market history, with the Dow Jones Industrial Average (DJIA) dropping by 22.6%. The crash demonstrated the speed with which a market downturn can spread globally in a heavily interconnected world economy.
It led to the implementation of protective mechanisms, like trading curbs and circuit breakers, to prevent such extreme market volatility in the future.
Furthermore, the crash precipitated examinations into advanced computerized trading models and prompted a shift towards observational studies to better comprehend complex, erratic market behaviors.
Explanation
The Stock Market Crash in 1987, commonly known as Black Monday, did not have a predetermined purpose, as it was not an event designed or intended by any party. Rather, it was a large-scale financial downturn that served as a catalyst for regulators and participants in the global financial industry to reassess their practices, regulations, and safeguards.
The crash, which saw the Dow Jones Industrial Average plummet 22.6% in a single day, emphasized the need for proper risk management tools and highlighted the potential ramifications of automated, program trading. Post-crash evaluations of the event were used to drive changes in the investment industry and augment the understanding of market dynamics.
Regulators and market participants used the unfortunate event as a learning experience to prevent future market crashes and enhance the resilience of the global financial system. This is illustrated by the introduction of circuit breakers, which halt trading temporarily in response to large market swings, in many global market exchanges following Black Monday.
The crash also underscored the importance of diversification in investment portfolios to mitigate risks associated with market volatility.
Examples of Stock Market Crash in 1987
Black Monday:Regarded as one of the most severe stock market crashes in history, Black Monday took place on October 19,
The Dow Jones Industrial Average (DJIA) fell a whopping
6% in a single day. This global crisis started in Hong Kong and quickly spread to Europe, eventually impacting the United States. The reasons behind the crash remain unclear, but program trading and overvaluation of stocks are among the speculated causes.
Impact on Mergers and Acquisitions: The stock market crash of 1987 led to a significant slowdown in the mergers and acquisitions industry. As stock prices plummeted, the value of deals also decreased, leading to a major downturn in this sector. For instance, Campeau Corporation, a Canadian company, failed to complete its acquisition of Federated Department Stores due to the aftermath of the stock market crash.
Effect on the Insurance Industry:The crash had a significant impact on the insurance industry. Due to heavy losses in the financial market, insurance companies that had invested in stocks faced significant decreases in their asset values, leading to liquidity problems. American insurers, such as Prudential, which held billions in equities, had to deal with a sudden, significant drop in the value of their portfolios.
FAQ: Stock Market Crash in 1987
1. What occurred during the stock market crash in 1987?
On October 19, 1987, a date that subsequently became known as Black Monday, the stock markets around the globe crashed, with a record-breaking percentage drop. The Dow Jones Industrial Average (DJIA) plummeted by about 22% in a single day.
2. What were the causes of the 1987 stock market crash?
The exact cause of the crash is debated among economists and historians, but some of the potential contributors include program trading, overvaluation, illiquidity and market psychology.
3. What were the effects of the 1987 stock market crash?
The crash had significant global impact, contributing to a worldwide recession. However, the markets recovered relatively quickly. It also led to improvements in trading systems to prevent such drastic crashes in the future.
4. How did the 1987 stock market crash impact future trading practices?
In response to the crash, stock markets around the world implemented safeguards, such as trading curbs and circuit breakers, to prevent panic-selling.
5. How did the 1987 stock market crash compare to other historical crashes?
In terms of percentage loss, Black Monday stands as the worst single-day crash in U.S. stock market history.
Related Entrepreneurship Terms
- Black Monday
- Program Trading
- Portfolio Insurance
- Market Liquidity
- Global Financial Impact
Sources for More Information
- History.com: This site provides historical context and information about important events, such as the Stock Market Crash in 1987.
- Investopedia: A trusted website with in-depth articles that break down complex financial topics, making it a good resource for learning about the 1987 Stock Market Crash in an easy-to-understand format.
- Bloomberg: Known for its comprehensive business and financial news coverage, this site offers good historical analysis and discussions on the 1987 Stock Market Crash.
- Federal Reserve History: A reliable source on U.S. financial history from the institution at the heart of the nation’s monetary system, offering detailed and accurate historical data.
