Stock Market Crash Prevention Measures
The history of the stock market is marked with many crashes. The one that happened in 1929, often referred to as the Great Stock Market Crash, caused the loss of money by numerous investors.
This crash lasted for around two and a half years. Today many historians continue to examine the potential causes of the Crash, which led to the loss of around 90% of the market value.
Before the Crash occurred investors were able to purchase a stock on the margin with as little as 10% down. The lesson learned is that when the prices begin to decrease this large leverage starts to work against investors.
The Crash has also caused the reconsideration of margin requirements, which were made stricter. Thanks to this, now not every stock or investor is allowed such a margin account.
What happened in 1929 was that there were too many stocks on the market, meaning that the market was overwhelmed with volume. As a result trades and prices were not able to be posted with the desired and required speed. This led to traders trading without having the needed trade transparency.
One of the sectors that managed to keep pace with volume is technology.
Another crash that was caused by volume overwhelm was the one that occurred in 1987. This crash resulted in the Dow's loss of more than 500 points.
This crash was additionally furthered by the use of complex computer programs. Programmed trading was implemented, which included the issue of more sell orders. An overall buy panic was observed as the automated systems started their work.
As a result of the crash losses amounting to more than $1 trillion in value were experienced.
In order to avoid such crashes in the future, several limits were implemented. They were required in order to calm the market down when it started to get on fire. Some of the restrictions include:
- If before 2pm the Dow has decreased by 10%, the trading activity will be terminated for one hour.
- If before 2pm the Dow has decreased by 20%, the trading activity will be terminated for two hours.
- If the Dow has decreased by 30%, the trading activity will be terminated for the trading day.
- If very significant events, such as terrorist attacks or natural disasters occur, the market will not be opened at all in order to avoid potential panic.
These limits are considered to be effective in preventing major market crashes. However, no one can say for sure how successful they can be. Many experts are doing their best in order to make sure that a major market crash that may destroy the profits of investors doesn't occur again.
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