Stock Market Crash of 1987 Term Paper

Download this Term Paper in word format (.doc)

Note: Sample below may appear distorted but all corresponding word document files contain proper formatting

Excerpt from Term Paper:

Black Tuesday)

Stock Market Crash of 1987

The purpose of this report is to discuss in detail the stock market crash of 1987. The stock market is supposed to fluctuate from day-to-day. But this account will delve into some of the less obvious reasons for that dramatic day on Wall Street and also providing additional insights into how and why investors are in the game and why they were so taken aback by that particular market downturn.

This testimony will also examine some of the more immediate consequences that occurred immediately following the events and how those series of events have carried through to the mindset of present day investments and the Federal Reserve Bank's policies and procedures. Then the report will try to ascertain some lessons learned so as to avoid repeating history.

The report also attempts to explain some investor philosophies that are continually occurring throughout history. Unfortunately, investors seem to constantly miss the signs that have lead and will continue to lead to major losses in the free market environments throughout world history.

The lessons learned also touch upon the steps taken by the overseers of the market itself that have the sole purpose of preventing future crashes of the magnitude of 1987's downturn. Some of those fail safes like new circuit breakers and market limits instituted after 1987 are still working to protect investors today.

Defining those measures will provide a new found understanding of the how our market works today. Events such as Black Tuesday and other current events like the Iraq war and the terroristic attacks on September 11, 2001, all have affects on the market and the typical investment strategy. To make things interesting, the report will do a bit of speculation in order to see if s severe market crash is in our immediate future or if the fail safes will suffice to keep the profits rolling in.

Why Do Investors Invest

Before getting into 1987 and Black Tuesday, a broader question may first come to mind. What motivates a person or an organization to buy securities in the first place? Basic economic theory states that money spent in one place can not be spent in another place. In other words, once committed in the securities market, that money is tied up and can not be spent in any different way. So, why don't people just spend their money on gadgets or televisions?

The key to the answer revolves around the fact that people in general want to create savings in order to pass the money into the future. Savings takes into consideration a person's future cash needs. Also, a second motivation is man's innate need to increase wealth. Better put, man likes to raise money in a way that is similar to raising children.

Making money grow often leads to a temporary insanity where the person desiring to raise or grow his money is compelled to get rich faster than is possible. The need for wealth forces an individual into taking a bigger risk than need be. If a person purchases a lottery ticket, his chance of getting rich increases in proportion probability to how many other people are playing and the possible random chances the lottery has built in.

The stock market is not like a lottery. One may be willing to invest with the intent of the big pay off which of course is similar to a lottery ticket purchase, but the sometimes the big payoff is not worth the price of participation. "How a lack of major news or important events prior to the decline could justify a 22% change. The cause was psychological, caused by an old memory. Thus it needed no events or important news to emerge." (Black Tuesday)

Sometimes the market bites.

(Market Crash of 1987)

The Efficient Market Theory

The efficient markets hypothesis proclaims no one in theory can ever beat the market. The main thought in the efficient markets hypothesis is that when it comes to stock or market prices, the market as an entity has already accounted for any and all relevant information. "This is a highly controversial and often disputed theory. Supporters of this model believe it is pointless to search for undervalued stocks or try to predict trends in the market through any technique from fundamental to technical analysis. Academics point to a large body of evidence that is in support of EMH." (Greatest Market Crashes)

Market efficiency has many implications for investors. Because the market is efficient it is very difficult to misdirect the investors for too long because only substantial news should move the price of a stock. But there seem to be exceptions to the efficient markets hypothesis. What the efficient market hypothesis does not take into consideration is an occurrence called speculative bubbles.

Basically, the prices can fluctuate in either direction because of the whims associated to a type of investor psychosis or even lunacy. Why would this have anything to do with the Crash of 1987?

Speculative Bubbles and Some Investor History

Throughout history, there have been many investors caught with their hand in the cookie jar so to speak. In investing that history revolves around the bursting of one speculative bubble after another. A speculative bubble is an investment phenomenon that can be equated to a school of piranha getting the smell of blood as an injured animal enters the water.

The bottom line is that these bubbles have historically been caused by greed and maybe even a in the human animal. Whatever the reason, it is more than apparent that investors keep repeating the same mistakes as though there have never been other speculative bubbles to learn from. Some examples of speculative bubbles have memorable names such as the Tulip-Bulb craze and the Florida Real Estate Craze. But of interest here is the Crash of 1987.

"A bubble occurs when investors put so much demand on a stock that they drive the price beyond any accurate or rational reflection of its actual worth, which should be determined by the performance of the underlying company." (Greatest Market Crashes) Even though the bubble events mentioned took place in completely different eras, the similarities can not be ignored. A bubble builds on a false notion that the good times will never end.

Take The Florida Real Estate Craze for example. In 1926, the United States economy was functioning on high gear and population in the United States felt, as is usually the case, that the nation's prosperity and growth was endless.

However, the real estate market crashed and many people lost fortunes and life savings. "The prices were so inflated that to buy a condo-style property in 1926, you would've had to pay the same as you would now have to pay for a luxury home in the guard-gated communities in Miami ($4,500,000) -- without adjusting for inflation!" (Greatest Market Crashes)

The crash in the real estate industry could have been prevented if only investors had read the recorded history of the Dutch. Because, in 1634, instead of Florida Real Estate it was the Dutch tulip industry; thus the name Tulip-Bulb craze.

Sure, the scenario could be said to not be related at all, but the all important outcome was the same. A virus created a new and unique color in tulip pedals imported out of Turkey. Demand for these particular flowers took off and the rest is history. "Thus, tulips, which were already selling at a premium, began to rise in price according to how their virus alterations were valued, or desired. Everyone began to deal in bulbs, essentially speculating on the tulip market, which was believed to have no limits." (Greatest Market Crashes)

Speculative bubbles will continue to occur. On October 19, 1987, the United States stock market could have been selling either Florida land or Dutch tulips. The end result was the same. "The amount the market declined from peak to bottom: 508.32 points, 22.6%, or $500 billion lost in one day." (Greatest Market Crashes) Investors seem too dense to learn. The speculative bubble history and the correlated finical losses are too overwhelming:

1634 Tulip-Bulb Craze

1926 Florida Real Estate Craze

The Nifty-Fifty Era

The Japanese Equity Bubble of the 1980's

Black Tuesday 1987

What Is Black Tuesday

As demonstrated by the hourly chart below, Black Tuesday was an intense effort to sell the house. When the Standard and Poorer's 500 Index fell approximately twenty percent in a single day on Tuesday, October 19, 1987, whole fortunes were lost in the blink of an eye. The twenty percent drop was the largest one day drop in the entire history of this or any other stock market performance.

(Black Tuesday)

There was also a less dramatic but just as serious ripple effect felt in markets all over the globe as they also crashed. The crash was so severe that many of the major stocks had to be pulled off the trading floor many for the first times in their history. When all was said…[continue]

Cite This Term Paper:

"Stock Market Crash Of 1987" (2004, October 05) Retrieved November 29, 2016, from http://www.paperdue.com/essay/stock-market-crash-of-1987-176367

"Stock Market Crash Of 1987" 05 October 2004. Web.29 November. 2016. <http://www.paperdue.com/essay/stock-market-crash-of-1987-176367>

"Stock Market Crash Of 1987", 05 October 2004, Accessed.29 November. 2016, http://www.paperdue.com/essay/stock-market-crash-of-1987-176367

Other Documents Pertaining To This Topic

  • Stock Market Crash of 1987

    Since institutional investors typically hedge their risks by using asset liability management and derivatives instruments against market risk, it is estimated that institutional investors in a representative stock market such as the London Stock Exchange lost only 10% of the value of their assets in the 1987 crash. In the absence of such hedging the effect of the crash and the resultant liquidity crunch would have been far greater.

  • Oil Prices and How They Affect the Stock Market

    oil prices and the stock market. The relationship between oil prices and increases in costs to transportation, heating and production are reviewed, and the role of spiking oil prices on market uncertainty is discussed. Overall, higher oil prices are historically linked to declining stock market prices, and it seems reasonable to suggest that future stock market decreases will come from current increases in oil prices. Stock market performance is strongly

  • Black Monday 1987 on Monday October

    Black Monday - 1987 On Monday, October 19, 1987, the Dow Jones Industrial fell 508 points -- which meant that it lost 22.6% of its value -- which was an unprecedented fiscal calamity at that time. This paper delves into that frightening dive, into the reasons why it happened, and looks into the possibility that it could happen again. Why did it happen? In January, 1987, the Dow Jones Industrials gained 13.8%, according

  • How Can We Make Profit Through Investing on Stock Market

    profit through investing on Stock Market Generally, all over the world financial markets exemplify a state of intricate and inscrutable situation. These marketplaces are of immense significance in the western nations, where the constituents employ their expertise to invest and generate profit whilst formulating a pool of funds, statistics, derivatives, shares and calculation intricacy. These constituents or elements are those investment maestros who are the whole and sole performers of

  • Efficient Market Hypothesis Implications of

    This is because, the efficiencies in the market are: providing no kind of leverage to these individuals. At which point, any kind of advantage that they may have would be eliminated. This is important, because it provides good insights, as to how efficient the markets really are. As a result, this is what will reduce the underlying returns every single year. The author is an economist with Oxford University.

  • Diversification in Stock Portfolios in

    Using a Technical analysis is equally ineffective since this analysis would not necessarily focus on the financial statements of the company, but rely on trends in the economy, price trends and overall market tendencies to predict where a particular type of stock will go. While this strategy is risk aversive in general, the point becomes moot again as the overarching quality of all stock in this economy rise and

  • Lipietz Alain 1987 Mirages and

    The rapid expansion of American manufacturing power was not due to purely domestic circumstances. Post-war, because the American economy was so strong relative to Europe and Japan, America had a wide array of venues in which to sell its products. This is why the postwar era is often called a kind of Golden Age of American manufacturing. America dominated all major industries and the dollar was the world standard of


Read Full Term Paper
Copyright 2016 . All Rights Reserved