Stock Market Crash Of 1987

Definition of 'Stock Market Crash Of 1987'


A rapid and severe downturn in stock prices that occurred in late October of 1987. After five days of intensifying stock market declines, selling pressure hit a peak on October 19, known as Black Monday. The Dow Jones Industrial Average (DJIA) fell a record 22% on that day alone, with many stocks halted during the day as order imbalances prevented true price discovery.

Investopedia explains 'Stock Market Crash Of 1987'


People speculate on the exact causes of the crash, which was rare in that the market made up most of its losses rather quickly, rather than preceding a protracted economic recession. Some people point to the lack of trading curbs, which markets have today, and automatic trading programs in place at the time as possible culprits.

The lead-up to October 1987 saw the DJIA more than triple in five years, and price/earnings (P/E) multiples on stocks had reached above 20, implying very bullish sentiment. And while the crash began as a U.S. phenomenon, it quickly affected stock markets around the globe; 19 of the 20 largest markets in the world saw stock market declines of 20% or more.

Investors and regulators learned a lot from the 1987 crash, specifically with regards to the dangers of automatic or program trading. In these types of programs, human decision-making is taken out of the equation, and buy or sell orders are generated automatically based on the levels of benchmark indexes or specific stocks. In a disorderly market, humans are needed more than ever to assess the situation and possibly override imprudent market thresholds.



comments powered by Disqus
Hot Definitions
  1. Benchmark Bond

    A bond that provides a standard against which the performance of other bonds can be measured. Government bonds are almost always used as benchmark bonds. Also referred to as "benchmark issue" or "bellwether issue".
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
  3. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  4. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  5. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  6. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
Trading Center