What were the main causes of the stock market crash?

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Actually, the only margin required at the time of the crash was five per cent. Industry in general had entered a period of extended expansion and the common belief was that the stock market would follow industry. There was also the common belief that the economy had entered a period...

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Actually, the only margin required at the time of the crash was five per cent. Industry in general had entered a period of extended expansion and the common belief was that the stock market would follow industry. There was also the common belief that the economy had entered a period of permanent growth; no downturn would ever happen again. In 1927, the market entered a period known as the Great Bull Market. People who knew nothing about the market were investing wildly buying large amounts of stock on margin. When the stock paid off, they raised their bets by purchasing even larger amounts on margin.

There is a famous story that J.P. Morgan was offered a "hot tip" on a stock by a shoe shine boy. Morgan immediately called his broker and removed all his investments; he commented that when shoe shine boys were investing in the market, it was time to get out fast.

By the beginning of 1929, it was obvious to financial experts that the situation had become unrealistic; however the wild profits that were being earned in a short time prevented any type correction. The market was rising on nothing but pure speculation. When it finally reached the point that investors had no confidence in its continued rise, it collapsed suddenly.

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I assume that you are asking about the stock market crash of 1929.  If so, there were a number of major causes.  They included:

  • Excessive faith in the market.  People were not buying stocks because they thought some particular company had good prospects.  Instead, they were simply buying on the idea that all stocks would go up forever. 
  • Buying on margin.  People were buying stock using borrowed money.  They were only required to put down 10% and they could pay their brokers the rest when their stocks went up.  This allowed for higher stock prices.

These things led to a huge bubble in the stock market where prices went up much more than they should have.  Then a few indicators went down and some people started to worry.  That started a panic in which people tried to get out of the market.  All the selling caused the crash.

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