Now each and every person is thinking global financial turmoil. Everybody is asking same questions!!! What is happening in United States of America, European Countries & their impact to Asian countries including India? Why it happened? When it is going to end? So guys today I am talking about what are these turmoils or bubbles or whatever you call them? And how these happened in the history at various point of time and in different places? So here I am providing some information on bubble, crashes and some of the major crashes in the history.
A bubble occurs when investors put so much demand on a stock/commodity that they drive the price beyond any accurate reflection of its actual worth, which should be determined by the performance of the underlying company.
Investing in bubbles often appears as though they will rise forever, but since they are not formed from anything substantial, they eventually pop. And when they do, the money that was invested into them dissipates into the wind.
A crash is a significant drop in the total value of a market, attributable to the popping of a bubble, creating a situation wherein the majority of investors are trying to flee the market at the same time and consequently incurring massive losses.
Attempting to avoid more losses, investors during a crash start panic selling, hoping to unload their declining stocks onto other investors. This panic selling contributes to the declining market, which eventually crashes and affects everyone. Typically crashes in the stock market have been followed by a depression. Thicker the bubble, harder will be crash.
It is important to note the distinction between a crash and a correction. A correction is supposedly the market's way of slapping some sense into overly enthusiastic investors. As a general rule, a correction should not exceed a 20% loss of value in the market. Surprisingly, some crashes have been erroneously labeled as corrections, but a "correction," however, should not be labeled as such until the steep drop has halted within a reasonable period.
The Tulip and Bulb Craze
When: 1634-1637
Where: Holland
Effect: At the peak of the market, a person could trade a single tulip for an entire estate, and, at the bottom, one tulip was the price of a common onion.
In this period contract prices for the newly-introduced tulip (due to virus attack, the color on the petals changed and because of this demand for the same drastically rallied) reached extraordinarily high levels and then suddenly collapsed. At the peak of tulip mania in February 1637 tulip contracts sold for more than 20 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble. The term "tulip mania" is often used metaphorically to refer to any large economic bubble.
The South Sea Bubble
When: 1711
Where: United Kingdom
Effect: Stocks in the South Sea Company were traded for 1,000 British pounds (unadjusted for inflation) and then were reduced to nothing by 1720. Massive amount of money was lost.
The mania started in 1711, after a war which left Britain in debt by 10 million pounds. Britain proposed a deal to the South Sea Company, where Britain’s debt would be financed in return for 6% interest. Britain added another benefit to sweeten the deal: exclusive trading rights in the South Seas. The South Sea Company issued stock to finance operations and gain investors. Shares were quickly snatched up from the start. The South Sea Company, seeing the success of the first issue of shares, quickly issued even more. This stock was rapidly consumed by the voracious appetite of the investors.
Eventually the management team took a step back and realized that the value of their personal shares in no way reflected the actual value of the company or its dismal earnings. So they sold their stocks in the summer of 1720 and hoped no one would leak the failure of the company to the other shareholders. Like all bad news, however, the knowledge of the actions of management spread, and the panic selling of worthless certificates ensued. The huge hole in the south sea bubble also punctured the unrealistic value and came crashing down.
The Florida Real Estate Craze
When: 1926
Where: Florida
Effect: Land that could be bought for $800,000 could, within a year, be resold for $4 million before crashing back down to pre-boom levels.
The 1920’s, in America, were a time of great prosperity. Florida became hotspot for tourism land prices started sky rocketing. Many astute investors took notice and started buying Florida real estate. The population in Florida was growing exponentially and housing couldn’t meet the demand. At this point, almost anybody could invest in Florida, even without much money. Credit was plentiful and soon everybody in Florida was either a real estate investor or a real estate agent.
Land prices quadrupled in less than a year and eventually, however, there were no "greater fools" to buy the disgustingly overpriced land, and prices began to adjust. Speculators realized there is a limit to the boom, and began to sell their properties to solidify their profits while they could and panic selling started. With thousands of sellers and very few buyers, prices came down with a sickening thud, twitched a bit, and then crawled down even lower.
The Great Depression (1929)
When: October 21, 24 and 29, 1929
Where: USA
Effect: More than 40% drop in the market from the beginning of September 1929 to the end of October 1929. In fact, the market continued to decline until July 1932 when it bottomed out, down nearly 90% from its 1929 highs.
So the reasons for the Great Depressions are…
1. Stock Market Crash of 1929
Many believe erroneously that the stock market crash that occurred on Black Tuesday, October 29, 1929 is one and the same with the Great Depression. In fact, it was one of the major causes that led to the Great Depression. Two months after the original crash in October, stockholders had lost more than $40 billion dollars.
2. Bank Failures
Throughout the 1930s over 9,000 banks failed. Bank deposits were uninsured and thus as banks failed people simply lost their savings. Surviving banks, unsure of the economic situation and concerned for their own survival stopped giving new loans. This exasperated the situation leading to less and less expenditures.
3. Reduction in Purchasing Across the Board
With the stock market crash and the fears of further economic woes, individuals from all classes stopped purchasing items. This then led to a reduction in the number of items produced and thus a reduction in the workforce.
4. American Economic Policy with Europe
As businesses began failing, the government created the Hawley-Smoot Tariff in 1930 to help protect American companies. This charged a high tax for imports thereby leading to less trade between America and foreign countries along with some economic retaliation.
5. Drought Conditions
While not a direct cause of the Great Depression, the drought that occurred in the Mississippi Valley in 1930 was of such proportions that many could not even pay their taxes or other debts and had to sell their farms for no profit to themselves.
Will be continued...
A bubble occurs when investors put so much demand on a stock/commodity that they drive the price beyond any accurate reflection of its actual worth, which should be determined by the performance of the underlying company.
Investing in bubbles often appears as though they will rise forever, but since they are not formed from anything substantial, they eventually pop. And when they do, the money that was invested into them dissipates into the wind.
A crash is a significant drop in the total value of a market, attributable to the popping of a bubble, creating a situation wherein the majority of investors are trying to flee the market at the same time and consequently incurring massive losses.
Attempting to avoid more losses, investors during a crash start panic selling, hoping to unload their declining stocks onto other investors. This panic selling contributes to the declining market, which eventually crashes and affects everyone. Typically crashes in the stock market have been followed by a depression. Thicker the bubble, harder will be crash.
It is important to note the distinction between a crash and a correction. A correction is supposedly the market's way of slapping some sense into overly enthusiastic investors. As a general rule, a correction should not exceed a 20% loss of value in the market. Surprisingly, some crashes have been erroneously labeled as corrections, but a "correction," however, should not be labeled as such until the steep drop has halted within a reasonable period.
The Tulip and Bulb Craze
When: 1634-1637
Where: Holland
Effect: At the peak of the market, a person could trade a single tulip for an entire estate, and, at the bottom, one tulip was the price of a common onion.
In this period contract prices for the newly-introduced tulip (due to virus attack, the color on the petals changed and because of this demand for the same drastically rallied) reached extraordinarily high levels and then suddenly collapsed. At the peak of tulip mania in February 1637 tulip contracts sold for more than 20 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble. The term "tulip mania" is often used metaphorically to refer to any large economic bubble.
The South Sea Bubble
When: 1711
Where: United Kingdom
Effect: Stocks in the South Sea Company were traded for 1,000 British pounds (unadjusted for inflation) and then were reduced to nothing by 1720. Massive amount of money was lost.
The mania started in 1711, after a war which left Britain in debt by 10 million pounds. Britain proposed a deal to the South Sea Company, where Britain’s debt would be financed in return for 6% interest. Britain added another benefit to sweeten the deal: exclusive trading rights in the South Seas. The South Sea Company issued stock to finance operations and gain investors. Shares were quickly snatched up from the start. The South Sea Company, seeing the success of the first issue of shares, quickly issued even more. This stock was rapidly consumed by the voracious appetite of the investors.
Eventually the management team took a step back and realized that the value of their personal shares in no way reflected the actual value of the company or its dismal earnings. So they sold their stocks in the summer of 1720 and hoped no one would leak the failure of the company to the other shareholders. Like all bad news, however, the knowledge of the actions of management spread, and the panic selling of worthless certificates ensued. The huge hole in the south sea bubble also punctured the unrealistic value and came crashing down.
The Florida Real Estate Craze
When: 1926
Where: Florida
Effect: Land that could be bought for $800,000 could, within a year, be resold for $4 million before crashing back down to pre-boom levels.
The 1920’s, in America, were a time of great prosperity. Florida became hotspot for tourism land prices started sky rocketing. Many astute investors took notice and started buying Florida real estate. The population in Florida was growing exponentially and housing couldn’t meet the demand. At this point, almost anybody could invest in Florida, even without much money. Credit was plentiful and soon everybody in Florida was either a real estate investor or a real estate agent.
Land prices quadrupled in less than a year and eventually, however, there were no "greater fools" to buy the disgustingly overpriced land, and prices began to adjust. Speculators realized there is a limit to the boom, and began to sell their properties to solidify their profits while they could and panic selling started. With thousands of sellers and very few buyers, prices came down with a sickening thud, twitched a bit, and then crawled down even lower.
The Great Depression (1929)
When: October 21, 24 and 29, 1929
Where: USA
Effect: More than 40% drop in the market from the beginning of September 1929 to the end of October 1929. In fact, the market continued to decline until July 1932 when it bottomed out, down nearly 90% from its 1929 highs.
So the reasons for the Great Depressions are…
1. Stock Market Crash of 1929
Many believe erroneously that the stock market crash that occurred on Black Tuesday, October 29, 1929 is one and the same with the Great Depression. In fact, it was one of the major causes that led to the Great Depression. Two months after the original crash in October, stockholders had lost more than $40 billion dollars.
2. Bank Failures
Throughout the 1930s over 9,000 banks failed. Bank deposits were uninsured and thus as banks failed people simply lost their savings. Surviving banks, unsure of the economic situation and concerned for their own survival stopped giving new loans. This exasperated the situation leading to less and less expenditures.
3. Reduction in Purchasing Across the Board
With the stock market crash and the fears of further economic woes, individuals from all classes stopped purchasing items. This then led to a reduction in the number of items produced and thus a reduction in the workforce.
4. American Economic Policy with Europe
As businesses began failing, the government created the Hawley-Smoot Tariff in 1930 to help protect American companies. This charged a high tax for imports thereby leading to less trade between America and foreign countries along with some economic retaliation.
5. Drought Conditions
While not a direct cause of the Great Depression, the drought that occurred in the Mississippi Valley in 1930 was of such proportions that many could not even pay their taxes or other debts and had to sell their farms for no profit to themselves.
Will be continued...
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