Black Monday
Candlefocus EditorThe day's crash results from a combination of factors, namely program trading, portfolio insurance, and a high-leverage stock market. Program trading is when computers are used to buy and sell large blocks of stock quickly, and this can lead to sharp drops in prices if the traders aren't careful. Portfolio insurance is a tool that tries to help investors protect their portfolios from losses by hedging them against short-term market losses. Finally, stock markets across the world had begun to become increasingly more leveraged, meaning that investors were using borrowed capital to buy stocks.
In the wake of Black Monday, the US Securities and Exchange Commission (SEC) was quick to create new protective safeguards to help combat the possibility of a similar crash occurring again. These included specific trading curbs and circuit breakers, which would limit trading and allow for enough time for order and reason in the markets, as well as providing the opportunity for buyers and sellers to adjust to newly formed market conditions.
Even with these precautions, investors still need to take measures to ensure that their portfolios are prepared for any market event, even one reminiscent to the 1987 crash. Having a plan in place that limits losses, diversifies portfolios and constantly monitors the state of the markets will help investors stay afloat should another Black Monday ever happen again. Properly managing risk and understanding the current market conditions can help protect portfolios from a potential crash. Ultimately, being prepared and doing the necessary research are important steps that individual investors should take before investing, thus minimising their chance of heavy losses in a market crash, like Black Monday.