In the 1930’s the stock market crashed. The people's faith in a confusing concept is why it crashed. Stock has always been under a shroud of confusion when people tried to make money off of it.Everyone became intrested in stock around the 1930’s people all thought it was an easy way to make money, but when the fundamental value of stock is so over habituated, people often forget that if the company goes bad, the stock goes bad. Stocks crash for many reasons, one main reason is when a bubble pops, a bubble is usually created when the p:e ratio is above that of the s&p 500’s, when a company's p:e ratio is above this, that means the company is growing faster than the average of all the other top 500 companies on the stock market, this often,if
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So when a stock is overvalued because of its high demand, the price of the stock goes up, but the company's earnings don't go up with the price, This makes the p:e ratio unusually high and any time this ratio is above 35 the market pops. So how does a market pop? Well, when demand goes down and price stays the same the market crashes, this leads to the stock price to crash, and when the stock does bad nobody is interested in buying and everyone is selling, this leads to a high supply of stock and a low demand for the stock,when supply is high and demand is low price crashes to meet the demand price and thus the market crashes.So how do you prevent a devestating crash? For a capitalist society, you can't, but for a socialist society it is easily preventable. The government needs to buy all the stock and then sell it at a price that is close to the stock's fundamental value, this makes the stock worth more and makes people re interested in the …show more content…
This is the cycle happened when farmers took out big loans for food because of the war the farmers did not account for the fact that demand for food would plummet after the war, this caused a surplus of food and no one to sell it to because transporting the food to the cities was too expensive and food was not a desired product in farming towns. This lead to the banks failing because no one could pay their loans, and everyone wanted to take out their money because they were afraid the bank would run out. This leads to the bank's bankruptcy as loans are not paid the bank obtains those assets that the loan was used for, but because those assets are not as valuable the bank is already starting to lose money. Bank runs provide the killing blow to the bank, this is when more than 5% of the total customers at the bank ask to withdraw all their money at once this means that the reserve ratio of the bank is all gone because it had to be paid out to the customers. These 2 factors are why the banks failed during the Great Depression. So who cares? Why were banks so important to the economy to begin with? Well the economy is
So when a stock is overvalued because of its high demand, the price of the stock goes up, but the company's earnings don't go up with the price, This makes the p:e ratio unusually high and any time this ratio is above 35 the market pops. So how does a market pop? Well, when demand goes down and price stays the same the market crashes, this leads to the stock price to crash, and when the stock does bad nobody is interested in buying and everyone is selling, this leads to a high supply of stock and a low demand for the stock,when supply is high and demand is low price crashes to meet the demand price and thus the market crashes.So how do you prevent a devestating crash? For a capitalist society, you can't, but for a socialist society it is easily preventable. The government needs to buy all the stock and then sell it at a price that is close to the stock's fundamental value, this makes the stock worth more and makes people re interested in the …show more content…
This is the cycle happened when farmers took out big loans for food because of the war the farmers did not account for the fact that demand for food would plummet after the war, this caused a surplus of food and no one to sell it to because transporting the food to the cities was too expensive and food was not a desired product in farming towns. This lead to the banks failing because no one could pay their loans, and everyone wanted to take out their money because they were afraid the bank would run out. This leads to the bank's bankruptcy as loans are not paid the bank obtains those assets that the loan was used for, but because those assets are not as valuable the bank is already starting to lose money. Bank runs provide the killing blow to the bank, this is when more than 5% of the total customers at the bank ask to withdraw all their money at once this means that the reserve ratio of the bank is all gone because it had to be paid out to the customers. These 2 factors are why the banks failed during the Great Depression. So who cares? Why were banks so important to the economy to begin with? Well the economy is