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Black Monday and How to Prevent It
What is Black Friday
Black Monday refers to the stock market crash that occurred on October 19, 1987. It was a significant event that saw the Dow Jones Industrial Average drop by 22.6%, marking the largest single-day loss in the stock market’s history.
What Happen During Black Monday, October 19, 1987?
Black Monday, also known as the stock market crash of 1987, was a significant event that occurred on October 19, 1987. It was a global phenomenon that affected stock markets around the world, but it was primarily focused on the United States.
On Black Monday, the Dow Jones Industrial Average, which is a stock market index that measures the performance of 30 large companies in the US, dropped by 22.6% or 508 points in a single day. This was the largest one-day percentage decline in the history of the US stock market.
$500B ($500,000,000,000) was wiped out in one trading session.
The crash was the first financial crisis of global proportions, demonstrating how interconnected financial markets became through electronic trading. In total, there were declines in all 23 stock exchanges that day, with 19 falling more than 20%. The losses amounted to an astonishing $1.7T.
Black Monday was triggered by a number of factors, including rising interest rates and increasing trade imbalances. Many investors had also become overconfident and were engaging in risky behavior, such as using margin to buy stocks.
As the market began to decline, panic selling set in, and many investors began to sell their stocks in large volumes. This, in turn, led to further declines in the market, as prices continued to fall.
The crash was not limited to the US, as stock markets around the world also experienced significant declines. The crash led to a global recession, and many countries experienced high unemployment and low economic growth in the years that followed.
Major Impact of Black Monday
A regulatory change was made to move the option expiration phenomenon known as triple witching from the morning hours to the afternoon. Consequently, the market would not be exposed to accelerated selloffs from large, institutional investors.
In the event of another steep and sudden decline in stock prices, trading floors added circuit breakers to their electronic trading systems. There would be three thresholds for the circuit breakers.
A further fifty basis points were slashed by the Fed, and billions of dollars were injected back into the financial system through the purchase of long-term Treasury bonds. Eventually, this practice became known as quantitative easing. Moreover, the Fed encouraged banks to continue making loans on their usual terms, which contributed to the maintenance of financial liquidity.
How To Prevent Black Monday from Happening Again?
Let’s begin by implementing circuit breakers as a first step. Circuit breakers are mechanisms that are built into the stock market to prevent it from collapsing during times of market downturn. In order to work, they automatically halt trading when certain predetermined levels have been reached. A market drop of a certain percentage, for example, might cause trading to be halted for a period of time when the market drops by that percentage.
For an investor, you can always implement stop-loss strategies into your trading. It could help your portfolio from suffering tremendous loss.
Next, always diversify your portfolio. When investing in a diversified portfolio, you are spreading the money that you have invested across a variety of types of assets, including stocks, bonds, and commodities. It is important as it can help in reducing the risk of losing all your money in one particular investment.
Apart from understanding and having in-depth knowledge of investment prior to making any investment decision. Maintaining up-to-date knowledge of market news and events is equally important to keep yourself informed so that you can make informed investment decisions in the future. Pay attention to trends and economic indicators, such as inflation, interest rates, and unemployment rates.
During times of market turbulence, it is easy to get caught up in the panic, but selling your investments in a panic can lead to bigger losses than you would have expected. Remember, avoid panic selling at all costs! Instead, stay calm and consider the long-term outlook for your investments. Always stick to your investment plan that includes realistic goals, and a strategy; and sticking to it even when the market is volatile.
In comparison to the 1929 Stock Market Crash, which sparked the Great Depression, the 1987 Stock Market Crash recovered relatively quickly, regaining its pre-crash height within two years of the crash.
No single factor contributed to the Dow’s largest daily decline in history, but a number of precedents established by the crisis, including greater transparency from the Federal Reserve and circuit breakers on electronic trading systems, have prevented similar catastrophes from occurring in the future.
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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.
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