Many of us remember the markets crashing in March 2020.
On 16th March 2020, the US markets fell by about 13% in a single day.
It was triggered by the start of the pandemic that we’re still not out of yet.🧵
This single-day fall was much bigger than the big shock some investors had seen before that - 2008.
On 15th October 2008, the US markets fell about 7.87% in a single day.
This was caused by the housing crisis.
But the thing is, neither of these is the biggest single-day fall.
Even when the Great Depression started in 1929, the highest single-day fall experienced was only 12.82%.
The largest single-day fall ever experienced was on 19th October 1987: the Black Monday.
On this day, the markets fell by 22.61%.
Black Monday: -22.61%
Pandemic March 2020: -12.93%
Start of Great Depression: -12.82%
Housing crisis Oct 2008: -7.87%
What caused this? Let’s follow what actually happened that day.
It was still night in the US when the markets in Japan opened up.
As soon as they opened up, sharp selling started. As other markets opened up the panic spread.
One by one, markets opened up, and seeing what happened in the Japanese markets, the selling started: Hong Kong, Frankfurt, Berlin, London, and eventually, New York.
Just one trading day earlier, there had been another fall but analysts generally expected that to be followed by a rally.
Outside of the markets, the odd thing was, there was no strong negative news as such.
The economic indicators were still nothing to worry about nor were there any political unrest and there certainly wasn’t any virus spreading around.
When the markets closed, nobody had a real clue about what happened. It just seemed to have happened.
It went down, some people heard it went down, so they started selling, that news spread, and so even more people started selling.
Now, we know one big reason why this happened: computers!
Computers were relatively new to trading back then.
Before that, trading was done on the exchange floor by traders - humans.
They would shout, use hand signals, and do whatever else that could be done to get their trades a match.
Computers entered the scene. These could place thousands of orders at once.
These computers were owned by very large asset managers - insurance companies and other funds like that.
Besides other advantages, computers had been placed to protect investors.
What they would do is ensure losses don’t grow too deep.
They had been programmed to sell at a certain amount of loss. Since they were not humans, they couldn’t factor in any other news.
When the losses of their shares reached a certain point, they automatically started selling.
That led to more people selling. And that led to other computers selling.
Back then, news and information didn’t spread as rapidly as it does now.
Today, when there’s rapid selling, investors instinctively start looking for a reason behind the fall.
Back then, they could not. When there was selling, they assumed something bad and started selling themselves.
So some selling somewhere led to more selling somewhere else, led to computers selling, led to more computers selling, and more investors selling… that’s how you arrive at the worst single-day fall ever - without a valid reason.
Black Monday is why circuit breakers were introduced.
Circuit breakers shut down the markets temporarily to stop panic selling.
The markets could be halted for 15 min or a couple of hours depending on which exchange it is and how much the fall is.
They might have been the reason why in the crash of March 2020, the single-day falls weren’t bigger than Black Monday.
All of this still explains how it played out - not what caused it.
The exact true origin of the fall, the reason why the fall truly started, is something nobody knows - even today.
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This is also known as the dividend to price ratio.
It is the ratio of the annual dividend given out by a company to the price of the stock.
Dividend to price ratio = dividend / price of stock.
It is an important metric because it is also a part of the income of an investor.
Some stocks’ price may not climb much but they might give good dividends.
It is not necessary that every company gives dividends. There are several that don’t choosing instead to reinvest the amount back into the company’s business.