Literature Review on Financial Assets During Breakdown of Stock Market throughout History

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Table of Contents
1. Introduction 3
2. Literature Review 5
3. Critique 8
4. Conclusion 10
5. References 11

Wall Street Crash of 1929; Black Monday, 1987 and the stock market downturn of 2002

Introduction
Stock market plays a very crucial role in the development of financial balance in an economy. The U.S. stock market has been contributing to the world economy and the global stock market. It has been regulating shares, bonds and financial liquidity. Wall Street in the U.S., serves as the financial center of the world, located in New York.
There was a major breakdown of the stock market at Wall Street in the U.S. Though the stock market had crashed in the U.S., it had adverse effects on the economies of other countries as well. The economy of different countries had to experience a slowdown. The clash of the stock market was one of the most destructive in the financial history of the U.S. The stocks had crashed on October 24, 1929, on Thursday. The highest fall of the stock was observed on the following Monday and it continued till the next day.
The beginning of the crisis and breakdown started on Thursday, on 24th October 1929, when the investors started getting their money back through the selling of the stocks. This Thursday is therefore, commonly known as “Black Thursday”. However, the situation of crisis was felt in the next week on Monday, when the prices of the stock had fallen so much that all the investor’s money had gone and there were no choices of financial returns for the investors. They gathered in large numbers and crowded the Wall-Street in order to protest and get their money back. Thus, as per most of the researchers, the Wall-Street crash was mainly due to the selling of large number stocks by stock holders. This generated a financial crisis in the market and as a result of it, the stock market had a break down. There were adverse effects on the crude oil prices in UAE and they had to suffer huge losses due to selling of oil at low rates. Researchers, economic scholars and experts identified many other reasons.
Following the Wall-Street crash of 1929, there was another market crash in 1987, which is known as “The Crash of 1987”. It was witnessed on 19th October, 1987. In this crash, the market declined by about 23% which is the highest one day falling of the market till now. The breaking of the market was of about 509 points. This day, is therefore known as “Black Monday” which is observed as “Black Tuesday” in New Zealand and Australia considering their time zone difference. Such a large fall in the stock market in one day, was not witnessed ever before. Crude prices in UAE fell considerably, by about 50%, due to the financial collapsing of OPEC in 1986. This led to increase in financial insecurity and uncertainty among the people who had invested in the stock markets. This was mainly caused due to the sudden outburst of investors who were ready to invest in any product irrespective of its product value and reliability. Many irresponsible companies and businesses got their revenues from the people in the form of critical investments where investors were very attracted by advertising and promotions. This also considerably reduced the oil prices in UAE for the international global market.
Following the crash of 1987, was the Dotcom crash in 2000 to 2002, which resulted in the downturn of the stock market in 2002. The western countries were greatly influenced by its effects. This down turn resulted from many activities that were started in 2000. These activities include excessive investment in the companies by investors. In this condition, there were huge financial flows from the people and companies as it was the decade that observed the spread of the internet till 1998. Many companies developed bonds and investments way beyond their control and as a result of this, they were not able to bear the load of continuously increasing cash flow in the market with the success of the internet industry. In this crash or downturn, there was a reduction of about 78% in few of the stocks, like the NASDAQ composite whose value reduced from 5046.86 to 1114.11. The large scale adaption and use of the internet as well as huge expectations from the small companies resulted in the stock market downturn of 2002.

Literature Review
Many researchers and economic scholars have developed various reasons for the decline observed in the index to the lowest value of 110 in October. It was a sign of the great depression that was going to follow it. It was therefore, necessary to hold the stock index by avoiding selling of stocks and purchasing more and more stocks from the market. But, this was not carried out and a sudden selling of stocks by the investors resulted in the crashing of the Wall-Street stock market (White, 1990).
Researchers also claim that the negative effects of the war took time to get intensify. It gradually got intensified by 1929, as a result of which, there was a huge economic crisis in the market and people were becoming poorer day by day. As a result of this, they decided to get their money through the selling of the stocks. Many people and investors got their investment amount with credits back. This bankrupted the companies, due to unavailability of financial sources to return to investors (Aldcroft, 1977).
There were extensive losses suffered by western countries due to the First World War. As a result of this, they were striving hard to sustain their economy and regain the financial power that they used to have. The United States had a huge debt at the end of the First World War. They had used a major portion of their revenue in developing warfare equipment and ammunition that were required for this war (Thomas & Morgan-Witts, 2014).
However, they failed to identify the potential of these economic and financial resources in developing their economy. Due to this, during the phase of 1919 to 1929, large number of credits were provided to the people. Due to this, war stricken people took the advantage of getting credits without having the capacity to repay it. This resulted in bankrupting of the government departments that provided finance and funds to the people of U.S. the unavailability of resources and finance in the banking sector resulted in the development of the crash in the stock market (Sornette, Johansen, & Bouchaud, 1996).
This crash had a huge influence over all the countries across the globe, but the intensities differ from one country to another, due to the difference in dependence of these countries on U.S. economy. During this time, there was British control over parts of UAE and Dubai. The crashing of the stock market led to great depression in UK. This led to the falling of their revenues and as a result, their rule in Dubai was adversely affected. Dubai and UAE’s oil and petroleum industry had to suffer owing to the decrease in the purchasing power of different countries due to the Great Depression (Kindleberger, 1986).There was an increase in supply owing to the production of oil from the reserves and unavailability of better technology to store it. This led to the reduction in the prices of oil and caused huge losses to oil and petroleum companies in UAE. A major portion of these economies depended on oil and petroleum industry and hence, UAE’s economy faced a slowdown during this time (Bennett, 2008).
The early Wall-Street crash in 1929, was followed by a similar crash in 1987, which is called as “The Crash of 1987”. It was believed by the researchers that the crash began in Hong Kong, and it slowly spreaded to European countries. The fall in the market value resulted in depreciation of oil and petroleum products and this adversely affected UAE’s economy. This weakened the global markets in the east and it gradually came towards the United States (Sornette, Johansen, & Bouchaud, 1996).
The major impact of the crash was observed in Australia and New Zealand where there was a fall down of about 32% to 40 % in few markets owing to the downturn. It occurred even during the existence of “U.S. Securities and Exchange Commission”, which was established for maintaining the global balance among the economies to avoid the repetition of the Wall-Street crash of 1929 (Toporowski, 1993).
The development of a new economy was the best solution used by companies for frequent mergers and acquisitions with the other companies. Due to this, they continuously stayed in news and the investors considered it as a very viable chance to invest in these companies. According to researchers, this was due to the interests of the people in the companies that got huge publicity and had advertisements all over the market. People did not consider the credibility and background of the company and the founders of the company. People did not even analyze the marketing and financial policies offered by the companies. It was this negligence and ignorance of the investors which was taken advantage of by the companies and they developed schemes through merging with other companies.
After the crash of 1987, the market took years to regain its value and liquidity that was damaged and lost due to the crash. However, due to the terrorist attacks in the U.S. on 9th September, 2001, the stock market was facing a major threat of a slowdown. The case worsened after March 2002 and this led to a considerable decline of the stock market and the value of the stocks depreciated rapidly. This phenomenon is known as ”Stock Market Downturn of 2002”. The base of the downturn was formed during 2000, when there were many firms which were established for overcoming the economic crisis developed during the crash of 1987 (Thomas & Morgan-Witts, 2014). During this phase, New York Stock Exchange was observed to fall by 685 points from the initial day closing. Investors were rapidly investing in any plan without considering its details and checking the reliability and validity of the company. This resulted in considerable increase in the dotcom business, and led to the stock market downturn in 2002. UAE had adverse effects on its live stock value and the prices of gold, oil and petroleum had slashed after a long time (GULFBUSINESS.COM, 2014).

These are the three crashes or stock market downturns which have been observed in the last century. There are many scientists, economists and scholars who have critically evaluated these three crisis among the people. They have also developed the losses incurred to the economies in the process.
Their studies, theories and its evaluation have been discussed in the literature review section above and it has been critically analyzed in the critique section below.
Critique
The critical analysis and evaluation of the crashes of the Stock involves understanding of the economic terms, financial assets and studying of the market. The strategies that were developed by companies and stock exchange firms to attract and bring a large number of investors has to be evaluated. This also involves considering the pattern of increase and decrease of the stock market points in the global market (Sornette, Johansen, & Bouchaud, 1996).
On critically evaluating the reasons, it can be stated that in order to recover from the effects of the First World War, America promoted industrialization and promised a return to the people through the stock market. There was a huge flow of uneducated and unexperienced investors who started investing in the companies and the stock market. This provided extensive opportunities and chances of executing a fraudulent and attractive scheme to lure such investors and get maximum money from them. This served to be the basis of the great depression as the companies who got large investments from such people got bankrupted due to large losses in its operation or internal conflicts occurring in the management (Thomas & Morgan-Witts, 2014). As a result of this, they were not able to pay the promised money to investors. As a result of this, the manipulators and companies who are expert in utilizing the resources sold the shares at very high prices to investors for fulfilling their desire of investing in the stock market.

The effects of the Wall Street crash, in 1929 were observed to accelerate the Great economic Depression, which was observed in the next few years. Due to the Wall-Street crash, more than half of the banks of America had been bankrupted and more than 30% of the working population were unemployed. It observes that the impact of the First World War did not come up immediately, but it developed many economic crisis in the following decade. The Great Depression followed Wall-Street Crash of 1929 and this left a striking image threatening economic situations in UAE and other countries in the Middle-east and Far East (Beattie, 2012).
The crash of 1987 also was on the same line as observed in the Wall-Street Crash of 1929. There was a tremendous boom in the American economy after the Second World War. The economy had raised itself to an extremely high level. There were many companies who were ready to absorb the payment from the people. However, owing to the prosperity and economic boost in the western countries, there were many false advertising campaigns which were carried to get financial investments from the people in the name of development (Toporowski, 1993).
The crash of 1987, had to be the last crash as per market analysts. But, this was not the case observed. There was a similar downturn in the stock market in 2002. There were many external factors for this downturn in the stock market. The investors wanted to explore new ideas and take them to a bigger level where they can maximize their profit from the new plans and concepts. This involved developing of the internet at a tremendously fast rate, an increase in the networking of the companies, new possibilities of mergers and acquisitions for the company in the market (Arshanapalli & Doukas, 1993).

This served as the basis of excessive plans developed by the companies to accommodate large investments from the economically sound investors in the impactful nations like U.S., UAE, Canada, UK, Europe and lastly China. The economic boosts in these countries led to the advancement in technology and this increased the number of investors in these areas as they considered it as a very trustworthy source that would generate desired economic returns in the market.
On critically evaluating the condition, it could be stated that this crashes existed due to excessive investing of the investors in companies which were not providing quality products and services, but had attractive and appealing advertising over the media. The companies were not capable to absorb such a huge cash flow and as a result they got bankrupted where the money of the people was drained. This kind of fraudulent practices led to the development of such a crash in the stock market across the globe (Barlevy & Veronesi, 2003).
Conclusion
It can be concluded that the crashing of the stock market and gradually, the economy of the countries was due to the mismanagement of the investment by the companies as well as by investors. It had a huge impact on the crude prices in UAE and there were influences on gold prices as well as on the live stock exchanges in UAE.
Thus, it could be concluded that there has to be a development of an appropriate framework to control the measures of the companies in absorbing finance from the market had to be developed. This would continuously monitor the stock market policies and practices of the companies and would save the investors from severe losses and exploitation through fraud and unethical malpractices. Strict measures have to be taken against any small case of violation of the policies set by them.

References
Aldcroft, D. H. (1977). From Versailles to Wall Street, 1919-1929. University of California Press.
Arshanapalli, B., & Doukas, J. (1993). International stock market linkages: Evidence from the pre-and post-October 1987 period. . Journal of Banking & Finance, 193-208.
Barlevy, G., & Veronesi, P. (2003). Rational panics and stock market crashes. Journal of Economic Theory, 110(2),, 234-263.
Beattie, A. (2012). Market Crashes: The Great Depression (1929). Retrieved from http://www.investopedia.com: http://www.investopedia.com/features/crashes/crashes5.asp
Bennett, L. (2008). DUBAI. New Holland Publishers.
GULFBUSINESS.COM. (2014, January 2014). The World s Worst Stock Market Crashes. Retrieved from http://gulfbusiness.com: http://gulfbusiness.com/articles/insights/the-worlds-worst-stock-market-crashes/
Kindleberger, C. P. (1986). The World in Depression, 1929-1939. University of California Press.
Sornette, D., Johansen, A., & Bouchaud, J. P. (1996). Stock market crashes, precursors and replicas. . Journal de Physique I, 167-175.
Thomas, G., & Morgan-Witts, M. (2014). The Day the Bubble Burst: The Social History of the Wall Street Crash of 1929. . Open Road Media.
Toporowski, J. (1993). The Economics of Financial Markets and the 1987 Crash. .
White, E. N. (1990). The Stock Market Boom and Crash of 1929 Revisited. The Journal of Economic Perspectives, 67-83.

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March 10, 2018

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