The Panic of 1901 was started because E.H.Harriman and James Hills, titans of rail road industry, wanted to control of Northern Pacific Railroad.
In those days they started buying share of Northern Pacific Railroad from open market quietly and as there was no regulation on such buying no one have any idea of it. In April 1901, E.H. Harriman started buying Northern Pacific Railroad stock quietly and stock rose 25% in a month time.
Since overall market is raising no one predict that takeover is happening in Northern Pacific Railroad. Some trader thought that Northern Pacific Railroad stock rising to fast and they started shorting it.
When someone short stock, he in fact borrowing security from someone else and selling it. When price of security goes down person who shorted it, goes to market and buy at lower price.
But in this case as there are secretly buying was happening , stock continue it run and when on May 7, stock reach $143 and news floated what was happening behind the scene. When news came that Harriman is in race of buying, Hill and J.P Morgan try to stop him by putting in bids to buy stock as much as they could. Now it was open to all that it was race between Harriman and Hill, and sometime there are many people out there holding short position.
No one was selling and big buyers were forcing the price through the ceiling. Now shorter was caught in trap , they has to deliver the stock to whom they sold else the buyer can go to market and buy at market price and come back with bill to shorter. By the May 8 stock was trading $180 a share.
Next day fear and panic started in shorter and by noon shorter has bid the stock at $1000. When you have to have it, you have to have it.
Now at same time interesting thing was started in market, as shorts caught in very dangerous situation, they started selling other holding to raise money to cover their short position. Most of the other stock was down 10 to 20 points. Panic continues on next day and most of the other stocks were down 40 to 60 points.
This was the classical example that single stock created rest all stock on down journey. Same time there were few intelligent investor who has complete understanding of situation and got the opportunity to buy the stock that all are dumping because of their stupidity.
Article Inspired from book “Buffettology “
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