The 1929 stock market crash holds important lessons for the stock market today.
In October 1929, the stock market lost over 17% of its value, and by some economists’ account, led America into the Great Depression. Whether that is true or not is debatable; however, the irrational exuberance of traders leading up to the 1929 stock market crash, the uncontrolled use of margin by traders, and the use of insider trading information by a select few traders, were all contributing factors.
The financial markets and regulatory bodies learned a lot from the 1929 stock market crash, and as individual traders, you can also.
First, never enter into a stock trade with what Alan Greenspan once termed, “irrational exuberance.” As a trader you need to rationally evaluate the potential of a stock to continue to move up in value. You must also time your trade correctly to maximize profits while minimizing the risk of loss.
Failure to take an objective, unemotional approach to trading will result in your consistently buying stocks at their highs of the day, and selling your stocks in frustration at the lows of the day. This is no way to make money in the stock market. Ironically, many traders lose even larger sums of money because of the irresponsible use of margin.
Following the 1929 crash of the stock market, government rules were put into place to limit the use of margin. Generally, you are now limited to using margin for 50% of a stock purchase amount. Traders back in 1929 were using up to 90% margin levels. Using margin to trade will help you realize bigger gains when the stock moves in your direction, but it may also cause larger losses if the share price of your stock moves against you.
Finally, objectively analyzing your trades and using margin responsibly is worthless if you have bad information about a stock, or failed to research your trade to begin with. In 1929 traders on the floor of the New York Stock Exchange often had access to information that retail traders operating out of “bucket shops” and brokerage houses did not have. Things have changed somewhat since 1929, but it is still your responsibility as a trader to have all the information you can round up on a company, prior to executing a trade. In today’s market, there is simply no excuse for being uninformed.
The 1929 stock market crash provides valuable lessons for the stock market today. These lessons are only valuable, however, if the individual trader assumes the responsibility to assess trades rationally, use margin responsibly, and conduct thorough research prior to executing a trade.
Phillip Collinsworth is a stock market addict. He runs an informational website that provides suggested strategies and systems for raking consistent profits out of the stock market. To take advantage of this free resource make sure you check out his website at http://www.penny-stock-advisor.com/stock-market-for-beginners.html
Reuters - U.S. securities regulators on Tuesday gave the financial industry a reprieve from marking hard-to-value assets down to fire sale prices, throwing a lifeline to an industry beset by strained credit markets and the latest round of bank failures.
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