Black Monday

Black Monday

On Monday, October 19, 1987, the Dow Jones Industrial Average (DJIA) fell dramatically 508.32 and closed at a record-breaking low of 1738.40 points. This date known to the world as "Black Monday" and is documented as the worst stock market crash in history.

There are several factors which affect the stock market crash in 1987. However, the popular explanation for the crash is the selling of program trader, portfolio insurance and the great storm of 1987.

Program trading is the use of computers in stock market to engage in arbitrage and portfolio insurance strategies. Through the 1970s and early 1980s, computers were becoming more important. As a result, the market was being controlled more and set prices by computers rather than by investors who made careful deals. It caused the crash of 1987 when the price of stock fall below a preset price, and a programmed computer automatically sells that stock. Millions of shares were carelessly bought and sold during the course two minutes. Many people blamed program trading strategies for blindly selling stocks as markets fell, exacerbating the decline.

Portfolio insurance, a form of investment, is a strategy of hedging a stock portfolio against market risk by selling stock index futures short or buying stock index put options. The poor choices of portfolio insurance resulted in a crash in 1987. Some risky investors rely on their intuition instead of the reliable information. They sell their stocks when they think the market decline and their stocks loss value. But when they think that the market will increase again, they buy back their stocks at a lower value and use the profit made by the purchase to make up for the monetary losses within the portfolio. Consequently, it caused the value of the stocks to decrease below their real value.

Another explanation is the great storm of 1987, which happen on the Friday before the crash.