What is the 'Stock Market Crash Of 1987'

The stock market crash of 1987 was a rapid and severe downturn in stock prices that occurred over several days in late October 1987, affecting stock markets around the globe.

BREAKING DOWN 'Stock Market Crash 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. Thanks to support from the Fed and exchange lockouts, the selloff halted the next day and the market recovered most of its losses rather quickly. While speculation remains as to the exact causes of the crash, many 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. As a result, valuations rose to excessive levels, with the overall market's price to earnings ratio climbing 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 price levels of benchmark indexes or specific stocks. After the crash, exchanges implemented circuit breaker rules and other precautions to slow down the impact of trading irregularities in hopes that markets will have more time to correct similar problems in the future.

RELATED TERMS
  1. Crash

    A crash is a sudden and significant decline in the value of a ...
  2. Stock Market Crash

    A stock market crash is a rapid and often unanticipated drop ...
  3. October Effect

    The October effect is a theory that stocks tend to decline during ...
  4. SSE Composite

    The SSE Composite is a market composite made up of all the A-shares ...
  5. Automatic Execution

    Automatic execution helps traders implement strategies for entering ...
  6. Great Depression

    The Great Depression was a devastating and prolonged economic ...
Related Articles
  1. Investing

    The Silver Lining of a Stock Market Crash

    A stock market crash isn't always bad news for investors. Here is the silver lining.
  2. Investing

    The Two Biggest Flash Crashes of 2015

    A flash crash occurs when prices plunge in minutes, and then often recover just as quickly. Here are two major flash crashes that occurred in 2015.
  3. Investing

    October: The Month Of Market Crashes?

    In the finance world, October is a month to be feared, but is it justified?
  4. Investing

    Examining Credit Crunches Around The World

    Market tops and bottoms have proliferated the financial markets throughout history. Learn how countries dealt with these tough economic periods.
  5. Insights

    Is A Market Crash Around the Corner?

    With the right diversification and risk, your investment portfolio will weather any market crash.
  6. Tech

    Bitcoin Had a Flash Crash Scare This Morning

    According to a CNBC report, the digital currency crashed by $600 this morning, a day after reaching highs.
  7. Trading

    The Perils Of Program Trading

    The increasing use of program trading makes market glitches inevitable - and sometimes disastrous.
  8. Personal Finance

    The Safest Way To Travel In 2015

    Many have wondered if it is actually safe to fly or if they'd be better off taking an alternative form of transportation. Here’s a look at the statistics.
  9. Insights

    The Long View on China's Recent Stock Meltdown

    China's bull market was fueled by a widespread belief that the government’s economic reforms were a success and a sign that President Xi Jinping’s dream of a prosperous China was becoming a reality. ...
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. What caused the Stock Market Crash of 1929 that led to the Great Depression?

    Find out what led to the stock market crash of 1929, which in turn fueled the Great Depression, sparking a nearly 90% loss ... Read Answer >>
  3. What does the Dow Jones Industrial Average measure?

    The Dow Jones Industrial Average (DJIA) is a price-weighted index that measures the daily price movements of 30 large American ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center