Capitalism goes through cycles and the nadir of a cycle often revolves on a stock market crash. When the market crashes, investors sell as much as they can as fast as they can, causing prices to plummet. Those who hold onto their investments find that their holdings have decreased in value by a large percentage and may permanently lose money if companies go bankrupt or if investors sell while the market is low. However, excepting the 1929 crash, relatively few people lose everything in stock market crashes.
Stock market crashes are a regular -- if dramatic -- feature of modern capitalism, as "Bloomberg Businessweek" notes in an article on the causes of investor panic. Periodically, low profit reports, bankruptcies, loan defaults or some other type of gloomy financial news causes nervous investors to sell their assets. According to sources cited in "Bloomberg Businessweek," investors often exhibit a herd mentality, and other investors will panic and sell their investments as well, causing a steep decline in share prices, as an overwhelming number of people try to sell to a small number of buyers. Investors lose everything if they sell all investments at rock-bottom prices, if the companies they have invested in go bankrupt, or if their assets decrease in value to the point where they cannot pay off debts and are forced into bankruptcy.
The worst stock market crash in history occurred on October 23, 1929 and became known as Black Tuesday. The freefalling stock prices caused everyone to worry about market health and precipitated a run on the banks, in which depositors removed all their money. This caused the banks to fail.
Stock prices fluctuate regularly, and low prices do not necessarily mean that an investor is losing everything; the companies conceivably can recover and turn profit. However, a low market often causes companies to sell less, go into debt and eventually file for bankruptcy, and the stock of bankrupt companies is worthless. Millions of people lost their savings in 1929 and 1930 as a result of bank failures and bankruptcies.
The 2008 Financial Crisis
Almost 90 years and several stock market crashes later (notable crashes occurred in 1937, 1987 and 2000), a series of bankruptcies caused by bad credit, a real estate bubble and questionable accounting practices caused a financial crisis in the U.S. that quickly spread to other parts of the world. Investors with money in mortgage-backed securities lost considerable amounts when property owners defaulted on their loans. Tightened credit depressed the economy and caused a number of businesses to go bankrupt. However, the stock market recovered in 2009.
According to a 2009 Urban Institute report, those hit hardest by the 2008 financial crisis were seniors with investment-based savings or retirement plans. Millions of people saw the value of their investments drop dramatically in 2008, but those that stayed in the market saw many of their investments recover in 2009 and 2010. Those who bought shares in healthy companies during the recession made a considerable amount of money. However, many seniors had their savings in mutual funds, stocks and property and, unlike younger people, seniors were living off these savings and many could not wait for the market to recover to sell their houses or withdraw money from accounts for monthly or yearly expenses. As a result, many senior citizens lost 30 percent or 40 percent of their life savings, or even more.