The Stock Market Panic of 1901
One Goes up, the Other Down
By Chris Stallman,
Founder of YoungMonthly.com
When learning about the history of investing, you'll most likely hear how the market sank in 1929 leading to the Great Depression or how the Dow lost 31% in one week in 1987 but there is a very interesting story in which one stock soared through the roof while others plummeted in just a period of a few days: the Panic of 1901.
In 1901, a railroad company by the name of Northern Pacific Railroad was in high demand by three businessmen: James Hill, J.P. Morgan, and E. H. Harriman. In the early 1900's, when someone wanted to takeover another company, they would go in and secretly purchase stock in that company until they had a majority of the stock. When one person owns a majority of the stock, usually 51%, then they gain ownership of the company. It is now very difficult for this to happen because the SEC has enacted laws that require people to disclose the information when they own at least 5% but these laws didn't exist back in 1901.
These three men secretly began purchasing the stock in April of 1901, thus driving the price of the stock up about 26%. The market was also going up rapidly so people didn't think much of it but a large group of investors thought it might be a good time to short the stock.
The investors shorting the stock as well as the rest of the public were surprised when Northern Pacific Railroad made an incredible jump from $117/share up to $143/share on May 7th because the day before, the stock had just made a huge jump. Word began to circulate that Harriman was making his move in acquiring the company. Hill and Morgan, shocked, made a drastic attempt to purchase as much stock as possible to keep Harriman from owning a majority of the stock.
Normally, something like this would not have had as huge of an affect on a stock as you're about to hear but most of the people who had shorted Northern Pacific Railroad still had not covered and they were caught in a very bad position.
The people who were short on the stock tried to cover their shorts but there was no stock being sold so they couldn't cover and they watched as the stock continued to climb as they sat on the sidelines. On May 8th, the stock was already bid up to $180/share.
The panic began to set in the next day on May 9th when the people who were short on the stock began to make amazing bids to the owners so they could cover their positions. In just a few short hours, the investors had bid Northern Pacific Railroad up to $1000/share!
You probably see why a buying panic occurred with Northern Pacific Railroad, but that's not the only stock that was affected. It affected the entire stock market in a negative way. When a stock like Northern Pacific Railroad is trading for $1000/share, you can probably imagine that it would be very expensive to cover your positions. Well, it was so the traders began to sell all their holdings in other companies in order to raise money to cover their shorts, causing other stocks to begin sinking.
While Northern Pacific Railroad stock went up an incredible amount, the damage caused by the drop in other stocks cost investors millions. For the people who shorted Northern Pacific Railroad, most lost nearly everything they had. Although something like this happening again is improbable, it is always wise to know what a panic can cause, and to be careful when shorting a stock!
buckinvestor.com
jack |
