The Stock Market Crash of 2008 - why it happened and what it means for you

In October of 2008 the stock market crashed. It has been deemed the Panic of 2008. It led to financial crisis, and was caused by financial crisis in the economies around the world.

Why did it happen?

The stock market crashed, and finger pointing began. Some blame investors who feared recession and started dumping shares. Others blame the government for high debt, and still others blame the bank failures. So what did cause the stock market to crash? The stock market crashed in 2008 because of a variety of reasons. The following is a look at some of those reasons, and what they mean for you:

Money hoarding:

The economy is in a recession. Banks are declaring bankruptcy, and people are losing their homes to foreclosure. People are seeing that the economy is declining, and they are worried that they are going to be next to go down the financial drain pipe. So, what this is resulting in is that when the market starts to rise, people jump at the chance to get rid of their shares and have money available to them. They get out of the stock market, and either hoard their money, or invest it in CD's, gold, or high yield savings accounts. This means long term investments are the new thing, and short term investments are disappearing, which does not make the stock market any more stable, instead it makes investors wearier, and more panicked.

Interest rates:

One of the reasons the stock market crashed is that interest rates have been below the rate of inflation for the past 31 months, which in turn leads to financial disaster.

Bank failures:

The stock market was already in a bear market, but when some prominent banks began to fail, predictions of long term economic recession, and difficult times were prevalent. The media jumped on it. And then bank failures forced many investors to reevaluate where their money is, and how the markets were going, which lead to mass selling, and increased price drops. Now experts predict an economic recession that will last until 2010 or longer, which does not offer much hope for stock market stability in the near future. In addition to that, unless the real estate market, and other areas of the economy pick up, the stock market can only continue to collapse.

Housing market decline:

The financial crisis caused by any number of things, such as inflation, panic, poor government policies, high debt, too loose of lending standards, and more spread to the real economy and the housing market was hit the hardest. For a long time banks were giving out adjustable rate mortgages to just about anyone, but when the initial periods ended, and rates when up, people could not pay their obligations. This caused a lot of lenders to start losing money. Foreclosures rose high, and more and more banks were losing money. This lead to a tightening of loan standards and less money to lend out. This leads to many other areas of financial crisis. It is especially troublesome because even individuals who would normally qualify with no problem for a home, can't get a loan to get one. When the housing market dropped so severely, investors who had leveraged their homes to invest were seeing huge losses, and no way to pay back the money, which lead to people owing more on their homes than their homes were worth. So, this, in addition to difficulty getting loans is leading to foreclosure and a snail slow housing market, which is never good for the economy of stock market.

Layoffs:

As the economy gets shakier, and the government is doing little to help, companies are trying to make ends meet too, and one of the best ways to do this is to layoff their employees. This means that unemployment is on the rise and since creditors are tightening their rules and are holding onto whatever assets they still have, the economy continues to decline, and people continue to sell their investments off.

Panic:

Okay, so what we have learned so far is that banks are losing money and declaring bankruptcy, mostly because of too loose of standards for home loans. Foreclosures are on the rise, Americans are in debt, and the economy is in a decline. This often leads to panic. The stock market crashes because banks are failing, and people are panicking, and selling stocks and other investments. Investments do not seem like a good idea when you are watching all areas of the economy decline. This means that the crash occurred because any time the market started to turn around, and come out of the bear, the next day you see a flood of stocks being sold. Investors decide to cut their losses and get out before the market bottoms out, which almost inevitably causes the market to do just that-bottom out.

While it is not unwise to move to safer investments during a recession, too many people selling at once causes the prices to drop, and the market to crash.

What this means for you:

The causes of the stock market crash can mean both good and bad things for you. For one, stocks are at an all-time low, which means this is a prime time for investors that have some cash to get in. However, if you do decide to take this route it is important to understand that this is not a good time for short-term investment strategies, nor is it a good time to look for risky investments, start up companies, or those with poor past performance during a recession or economic decline.

Right now, the stock market is continuing to drop on a daily basis, this is affecting investors, especially those whose retirement is tied to the stock market, or who need money sooner rather than later. Many are left to wonder when the market will hit bottom, and if it will ever come back up. So far the government is attempting bailout plans and they are having little effect. If you have invested in a retirement or education fund, and need that money soon, you will probably need to get used to the idea of having less than you thought. If you can wait out the crash and decline, the market's history shows an increase at the end of every recession, which can mean your retirement portfolio is safe, or could be. If you can, consider converting some of your investments into hard assets like gold, which retains value well. This can help you in a rainy day, and should keep your financial portfolio afloat despite market fluctuations.

The other thing this means to you is that many Americans are looking for change. Something got us into the economic downward spiral that lead to a stock market crash, housing industry crash, and credit crunch. Many blame poor government policy and either too much, or too little regulation. The upcoming Presidential election has many investors hopeful for the future, and expectant of economic change, which should lead to a rise in the current conditions. However, the current conditions are as bad as they have been in a long time, and this means that there is not a quick fix solution, so you should think long term, get out of debt, and try to be as financially stable as you can while the economy, markets, etc. recover. Those investors with patience to hold onto their investment during the economic turmoil will be rewarded in time. Those who are reliant on that money now will see big losses, and potential financial ruin.

The stock market crash is going to take patience from investors and an optimistic outlook. If people stop investing, and continue to hoard their money, etc. the market crash could potentially lead to even bigger problems, such as another Great Depression. So, take advantage of the low prices if you can, and help the stock market recover. The worst thing an investor can do right now is sell their shares, because this means a paper loss becomes a capital loss. History always has a way of repeating itself and despite the crash, it will eventually rebound, just as it did with the 1929 crash, and the 1987 crash. Times will be tough, jobs will be lost, and some people may see financial ruin. However, if you practice good financial habits, such as having savings, emergency funds, little or no debt, etc. you should make it out of the economic crisis relatively unscathed. It does require patience.

Those with the least amount of debt won't be hit as hard with the stock market crash. It is always a safe investment to keep a little cash stored away in your home or on you at all times, but do not abandon banks all together or you will contribute to the problem, rather than help it.