October 19, 1987 was black and the stock market took a total plunge.There have been numerous days during the history of the stock market when everything came crashing down, but none as profoundly or fearfully as black Monday on October 19, 1987. It was during this one trading day that the stock exchanges lost substantial amounts of money all over the world and investors were left astounded and financial institutions were looking for answers. The resulting crash brought the market value of billions of dollars worth of companies, stocks and bonds into tatters in a matter of hours, highlighting problems in modern-day trading systems. The kicker is, it was a non-economic crisis event. Black Monday was a pivotal moment in financial history, the scars of which continue to be felt to this day in the financial world and the way regulators deal with extreme volatility.
Historic Drop
What was most amazing on Black Monday was the rapid decline. The share average for the Dow Jones Industrial average dropped by over 22 percent in one trading day making it the worst day-by-day percentage drop in the history of the average.
Global Spread
Fear wasn’t confined to the United States. Panic quickly spread in highly networked financial markets across Europe, Asia and Australia.
Computer Trading
The main reason cited was the use of computerised trading programs. Automated sell orders helped drive the drop and set the stage for a sell-off.
Investor Panic
The sell-off by investors accelerated as stock values declined. But fear came into full play and it was having its own rational say, spinning down the markets deeper.
Liquidity Crisis
There were many more orders placed for the items to be sold than there were that were offered for them to be bought, so there were far fewer buyers.
No Clear Trigger
In contrast to numerous recessions and financial scandals-related crashes, there was no single cause to Black Monday. This uncertainty only made the occurrence all the more alarming.
Banking Concerns
With the stock markets in their own peril, financial institutions were concerned about the failure rippling into other sectors. The crisis put a strain on the economy as well.
Media Impact
The violence was constantly covered in the news on television and in newspapers. The ongoing reports stoked fear and ensured investors stayed on the price down side.
Regulatory Changes
To meet these expectations, the regulators have taken measures like implementing circuit breakers. Automated systems temporarily block the trading if price declines are severe in the event of panic trading.
Lasting Lessons
One of the greatest lessons from Black Monday was the realization by investors that markets can change quite a bit in a short period. Increased importance of risk management, diversification and emergency protectors following the event.
Market Recovery
As terrible as the losses were, markets went on to repair themselves. The soundness of financial systems was reflected in the rebound, and the investors in these markets were warned of the risks of market participation.
