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  • Market regulators are accusing a British national of almost single-handedly causing a "Flash Crash" to American stock markets in 2010.

  • During the incident, the Dow Jones Industrial average dropped about 6%, and lost more than $1 trillion dollars in mere minutes.

  • Fortunately, stocks rebounded relatively fast after the shock, but we wanted to know, what does it take to crash a stock market?

  • Well, there have been countless financial "crashes" throughout history.

  • They even go back to the 1600s when modern stock exchanges were first evolving among the trade economies of Europe.

  • A crash represents a steep, sudden decline in the value of market prices, and they can often lead to an economic depression.

  • The most devastating crashes are usually the result of an overly-inflated market, also known as a "bubble".

  • Investment bubbles occur when prices of market shares are driven upwards past their real value.

  • According to some market theorists, a bubble is encouraged by a "herd mentality" ,

  • where people first jump on the bandwagon of a profitable stock, and then, when the bubble bursts, they engage in panic-selling.

  • The most famous example of this was during the 1929 American Stock Market Crash.

  • Before then, post World War I America experienced an economic boom,

  • optimism in the economy inspired many take on risky loans, and invest in stocks.

  • But when the economy slowed down people began to sell their shares - at first slowly, and then in droves.

  • Market prices went into freefall, and there were no fail-safe rules to stop the inevitable crash.

  • Stock markets can also be "spooked" into a decline or a crash following catastrophic events.

  • For example, San Francisco’s massive 1906 earthquake is thought to have played an integral role in the financial panic of 1907.

  • During that time, the market sank to about 50% of the previous year’s valuation.

  • Additionally, In 2001, after the September 11th terrorist attacks, the stock markets were closed for almost a week.

  • In the first five days back, the markets faced a loss of about $1.4 trillion dollars.

  • The digital era has also introduced new threats to the stock market in the form of "high frequency trading".

  • HFT is when thousands of trades are carried out by computers in fractions of a second.

  • The swiftness of computer programs at buying and selling puts traditional traders at a disadvantage.

  • Also, the use of HFT creates a lot of potential volatility in the stock market.

  • Computer programs that are designed to automatically respond to price points can trigger mass selling before anyone can notice.

  • This contributed to the 2010 Flash Crash, after a large enough downtick in stocks caused many HFT programs to further withdraw, leading to a drastic crash.

  • After that particular event, government regulators imposed new laws, called "circuit breakers",

  • that temporarily "pause" trading if a stock falls 10% or more within a 5-min period.

  • These safeguards give traders breathing room to reexamine their options instead of panicking and selling everything before the stock bottoms out.

  • The Securities and Exchange Commission works hard to regulate the wild swings of the stock market.

  • But for the modern era, stock markets remain more volatile, and susceptible to crashes than anyone might ever think.

  • Investing is a pretty risky thing to do, but sometimes big risks can have even bigger rewards.

  • To learn why Africa is such a hotspot for foreign investment right now, check out our video here.

  • Don’t forget to subscribe, and thanks as always for hanging out with us here on TestTube!

Market regulators are accusing a British national of almost single-handedly causing a "Flash Crash" to American stock markets in 2010.

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What Is a Stock Market Crash?

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    鄭小鬼 posted on 2021/08/02
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