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.

BREAKING DOWN '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.

RELATED TERMS
  1. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) ...
  2. Crash

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  3. Black Tuesday

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  4. Trading Halt

    A temporary suspension in the trading of a particular security ...
  5. Order Imbalance

    A situation resulting from an excess of buy or sell orders for ...
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    The quick drop and recovery in securities prices that occurred ...
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RELATED FAQS
  1. What caused Black Monday, the stock market crash of 1987?

    Find out about the factors behind the stock market crash of 1987, also known as Black Monday, when the Dow Jones Industrial ... Read Answer >>
  2. Where can I find all of the stocks in the Dow Jones Industrial Average?

    The best place to find a list of all thirty stocks included in the Dow Jones Industrial Average (DJIA) is the "Historical ... Read Answer >>
  3. What happens when a circuit breaker is put into effect?

    A circuit breaker represents a situation where the Securities and Exchange Commission (SEC) and National Association of Securities ... Read Answer >>
  4. What is Black Monday?

    Monday October 19,1987, is known as Black Monday. On that day, stockbrokers in New York, London, Hong Kong, Berlin, Tokyo ... Read Answer >>
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  6. During a disastrous trading day on the NYSE, the DJIA is down by 21% (a Level 2 ...

    The correct answer is d. A Level 2 decline (20% -30%) after 2pm requires closing the market for the rest of the day. There ... Read Answer >>
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