A stock market, also called a stock exchange, is a market for buying and selling stocks. The New York Stock Exchange (NYSE), founded in 1792, is the largest and most active stock market in the world. Other major markets are located in London, England; Hong Kong; Tokyo, Japan; Mumbai, India; and the European Union.
Stocks, or shares, represent ownership of a small part of a company. Not every company sells its shares. Companies that offer stock for sale are called public companies. A public company can raise money through the sale of shares. In return the stockholders gain a share of the company’s future profits and a voice in how the company will be run. As traders buy and sell stocks, their value rises or falls.
At times, a large number of stocks drop suddenly in value, creating a stock market crash. The most famous stock market crash occurred in October of 1929, and precipitated the worldwide Great Depression. October 29, 1929, “Black Tuesday,” was the last of several days of rapidly falling prices. During four days of trading, the market dropped by 25%. Leading up to the crash, the market had climbed to previously unknown levels. Many investors bought stocks using borrowed money or credit; when the stocks lost their value, the investors could not repay the loans. These bad debts worsened the Depression.
A less disastrous but even more drastic crash took place in October of 1987. By then, widespread computer trading carried on at electronic speeds affected the movement of the markets, and the NYSE’s value plunged by 22 percent. Other markets around the world sustained similar losses.
Even now, financial experts do not fully agree on the causes of stock market crashes. Some often-mentioned factors include computer trading, threats of war, lack of adequate regulation on trading, and human panic. However, stock exchanges have created regulations and technical solutions to prevent such drastic rapid losses from recurring.