The Stock Market Crash of 2008
18 November 2013
The Stock Market Crash of 2008
Our Country is dependent on a successful economy. The success of our economy has many underlying factors. One of the main factors is the Stock market. The stock market remains a stringent factor in our economic well-being and if it fails crisis occurs. A crash occurs when shares of stock reach 20 percent or higher which has only occurred three times and the most recent was 2008. In 2008, the United States stock exchange crashed causing not only a national economic crisis, but would cause a world-wide financial crisis. There are several factors that caused this crash but the main reason was the subprime mortgage crisis.
The stock exchange is a simple system to comprehend and was established centuries ago. The history of the stock exchange dates back to 1790 in Philadelphia, Pennsylvania. This would be the first time trading stocks was done in an organized fashion instead of at random like it was done prior. This location deemed successful for 30 years before it was moved to its permanent location on Wall Street in New York City. The stock market remained successful until it crashed on Black Tuesday in 1929. This crash resulted in the loss of billions of dollars and marked the beginning of the great depression. The great depression would last for about ten years and put America’s economy in the worst shape it has even been . During this period, Stocks would drop to record lows, half of the American banks would perish, and the unemployment rates would sky rocket. The Depression would finally recede after World War II. The next crash would not occur for decades but would affect the largest markets on the globe and would be referred to as black Monday. Black Monday, occurred on October 19, 1987. On this day stocks would drop 22% and this drop would send the global economy into a tailspin. 19 of the 20 largest markets throughout the world, would all see at least 20% drops. Luckily, the crash did not trigger a recession and would only result in the loss in a large number of financial careers. However, the blame of the crash would be pointed at the politicians rather then those in the financial world.
It is difficult to understand why a stock market crashes without a simple understanding of the subject. The stock market is a group of companies that meet a certain criteria. The companies are broken down into units. These units are then broken down and sold as shares; the shares are considered part ownership of the company. But, why would a company sell shares and give away assets? The stock market allows companies to finance themselves without taking out commercial loans known as debt financing. Debt financing results in large interest fees, which is why it is referred as “debt” financing. However, equity financing allows the companies to sell stocks to cover the costs of the company it also allows them to finance their company risk free. Both types of financing have theirs pros and cons, depending on ones situation. With the understanding of these simple topics it becomes easier to understand the stock market. With little understanding of the stock market, we can still comprehend the reasons behind the crash. There where many events that lead up to the crash of 2008 and it all started with subprime mortgage crisis. A subprime mortgage is given to someone with a low credit rating. In 2006, private sectors wrote out about 12 million loans worth up to 2 trillion dollars. These loans were given without the usual regulations. These regulations were parted from due to congress wanting to give out more loans. Unfortunately, this only worked for a short period of time, as many could not afford to pay back their loans with the high levels of interest. As these loans were not being paid off, banks were...
Citations: 1. Brian, M., & Roos, D. (n.d.). "How Stocks and the Stock Market Work". HowStuffWorks "Business & Money". Retrieved April 23, 2013, from http://money.howstuffworks.com/personal-finance/financial-planning/stocks.htm
Herbert H. Lehman Collections. (n.d.). Columbia University in the City of New York. Retrieved April 23, 2013, from http://www.columbia.edu/cu/lweb/indiv/lehsuite/
History of Lehman Brothers - Lehman Brothers Collection – Baker Library | Bloomberg Center, Historical Collections. (n.d.). Baker Library | Bloomberg Center. Retrieved April 23, 2013, from http://www.library.hbs.edu/hc/lehman/history.html
Itskevich, J. (2002, July 31). History News Network. History News Network. Retrieved April 23, 2013, from http://hnn.us/articles/895.html?page=5
Keaton, T. (n.d.). Why Is the Stock Market Important? | eHow.com. eHow | How to Videos, Articles & More - Discover the expert in you. | eHow.com. Retrieved April 23, 2013, from http://www.ehow.com/about_4617038_stock-market-important_.html
Stock market crash 2008 | SharesExplained.com. (n.d.). Learn about shares and the stock market - Shares Explained. Retrieved April 23, 2013, from http://www.sharesexplained.com/stock-market-crash-2008
Please join StudyMode to read the full document