A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles.

Stock market crashes are in fact social phenomena where external economic events combine with crowd behavior and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions: a prolonged period of rising stock prices and excessive economic optimism, a market where Price to Earnings ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants. There is no numerically specific definition of a crash but the term commonly applies to steep double-digit percentage losses in a stock market index over a period of several days.

Crashes are often distinguished from bear markets by panic selling and abrupt, dramatic price declines. Bear markets are periods of declining stock market prices that are measured in months or years. While crashes are often associated with bear markets, they do not necessarily go hand in hand.

The crash of 1987 for example did not lead to a bear market. Likewise, the Japanese Nikkei bear market of the 1990s occurred over several years without any notable crashes. The economy had been growing robustly for most of the so-called Roaring Twenties.

It was a technological golden age as innovations such as radio, automobiles, aviation, telephone and the power grid were deployed and adopted. Companies who had pioneered these advances, like Radio Corporation of America (RCA) and General Motors, saw their stocks soar. Financial corporations also did well as Wall Street bankers floated mutual fund companies (then known as investment trusts) like the Goldman Sachs Trading Corporation.

Investors were infatuated with the returns available in the stock market especially with the use of leverage through margin debt. On August 24, 1921, the Dow Jones Industrial Average stood at a value of 63.9. By September 3, 1929, it had risen more than sixfold, touching 381.2. It would not regain this level for another twenty five years. By the summer of 1929, it was clear that the economy was contracting and the stock market went through a series of unsettling price declines.

These declines fed investor anxiety and events soon came to a head on October 24 (known as Black Thursday) and October 29 (known as Black Tuesday).

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