stock market crashes

webmaster on Mar 11th 2010 11:04 am edit

  • explain how a stock market crashes


  • You might try and find a copy of JK Galbraith's Short History of Financial Euphoria, which tries to explain some of the underlying misconceptions about financial markets that lead to speculative bubbles and stock market crashes.


  • There are many factors associated with a stock market crash. Perhaps the most likely and noticable is a "bubble". A bubble is when stock prices increase in value faster than would be expected based on financial/market factors... This increase in value causes people to begin speculating that they can make loads of money by buying stock. When these people buy stock it pushes up the prices even more and so the bubble gets bigger and bigger (the stock prices rise higher and higher). Then finally at some point more people decide to sell than buy and the price begins to decrease, and when this happens people tend to get out of the market quick so many people sell their stocks within a short amount of time. This causes prices to plummit... that is the crash. Sometimes this crash simply brings the price back down to a reasonable level and sometimes it will take the price even lower.


  • That's an interesting thought Johnjri, and I do agree that high PE of the S&P suggests an "overpriced" market that might collapse... unfortunately "high PE" is impossible to define. The 3 years you suggested looking at have the following peak PE: 1929 32.56 1966 24.05 2000 42.87 And now notice these other years that didn't produce a crash the following year: 1899 23.27 1901 25.23 1995 25.02 1996 27.72 1997 33.03 1998 38.82 1999 44.19 If you had sold (trying to time the market to avoid a crash) during one of these years you would have missed great profits during the next year(s). If all I saw was the PE and decided to sell in 1997 for instance when PE broke over 30 then I would have missed almost doubling my money in 3 years. Or even worse if I sold in 1995 then I would have missed trippling my money in 5 years.


  • I'd also like to recommend a book. 'Irrational Exuberence' by Robert Shiller. I suggest you look at the last column in this table Authored by Robert Shiller labled "Price Earnings Ratio P/E10": http://aida.econ.yale.edu/~shiller/data/ie_data.htm Look in particular at years where the pe ratio is unusually high (ie: 1929, 1966, 2000). Then look at the results that follow the following years: http://finance.yahoo.com/q/bc?s=%5EDJI&t=my&l=on&z=m&q=l&c= -I am not a Google researcher-







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