A stock market crash is a severe and sudden drop in overall stock prices usually caused within a day. The market crashes are natural or can be man-made disasters, economic reasons, investor panic situations, or speculation.
There are a lot of articles, courses, and blogs about stock market crashes that tell its definition, causes, prevention, etc. But there are few of them which teach well and in detail about every aspect of the stock market.
One of the best stock market courses is offered by The Thought Tree (T3). T3 teaches every aspect of the stock market in detail including the stock market crash.
Now, let’s describe the reasons for the market crash in detail below:
Reasons for the Stock Market Crash
1. Natural or Man-made Disasters
Natural or man-made disasters can include all sorts of disasters, from floods to pandemics to wars. For example, the pandemic caused by Coronavirus in 2020 induced the crash of March.
The economic outlook for the United States and countries around the world looked bleak as awareness of the spread of COVID-19 began to take hold. As countries announced travel restrictions, mandatory business closures, and quarantines, consumers stocked up on essentials, causing shortages, businesses began protecting profit margins with layoffs and furloughs, and investors began selling stocks.
2. Economic Crisis
Some industry and economic issues often have an impact on the market. An example of economic crisis is the subprime mortgage crisis of 2007-2008. A decade ago, deregulation in the banking sector led to more mortgages for riskier borrowers. When these borrowers defaulted, home prices plummeted, and the real estate market collapsed. Many of the now-worthless mortgages were sold in bulk to institutional investors, losing billions of dollars. The Dow Jones Industrial Index fell 3,600 points between September 19th and October 10th as big companies began to go bankrupt.
3. Investor Panic
Panics in investors are one of the most common factors contributing to a stock market crash. Investors who fear that their investments will lose value sell their shares to protect their money. When stock prices start to fall, fear spreads among investors, and more selling can lead to a market crash.
From major market participants struggling financially to concerns about the impact of certain laws, many investors may panic and sell their stocks.
When people and companies invest in a sector in the hope that the asset or security will grow in the near future or based on expectations of future performance, there is often speculation that creates a bubble.
When performance disappoints and hype falls short of reality, the bubble bursts and massive selling follows.
Impact Of Stock Market Crashes
A crash can lead to a bear market. A crash can lead to a bear market. The market then fell 10% after the correction, totaling more than 20%. A stock market crash can also trigger a recession. If the stock price drops significantly, the company will find it difficult to grow. Firms that don't produce will eventually lay off workers to remain solvent. Expenditures decrease when employees are laid off. Less demand means less income, which means more layoffs. If the decline continues, the economy will shrink, and the recession will continue. Historically, stock market crashes preceded the Great Depression, 2001, and 2008 global recession.
Prevention for Stock Market Crashe
If we talk practically, there is no exact way to prevent these crashes in the stock market. But governments taking these crashes as severe problems have added some safeguards to prevent these kinds of crashes in the stock market and upset market stability.
Circuit Breaker: In trading, a circuit breaker is an emergency measure by which an exchange temporarily suspends trading activity if the market price falls significantly or suspends it for the remainder of the trading day.
As noted above, this system applies to each character’s securities and marketplace indices.
When these circuit breakers are trip, trading on all equity and equity derivatives markets. A market-wide circuit breaker is triggered by whichever movement the BSE Sensex or Nifty 50 breaks first.
After the circuit breaker is tripped, trading will be stopped according to the guidelines. After this time has passed, according
to the halt table, trading will resume only after the pre-open auction call session has ended.
For example, the New York Stock Exchange (NYSE) has a number of crash protection thresholds. They freeze trading on all stock and options markets during a sharp decline in the market, as measured by the one-day drop in the S&P 500 index.
A circuit Breaker is a trading brake that exchanges impose when volatility increases. After the 1987 Wall Street crash, circuit breakers became an important tool for the cooling of exchanges and global market regulators. When a stock touches a circuit breaker, trading on that switch stops for a while.
The circuit breaker halted trading in the country’s stock market during a dramatic drop, priced at 7%, 13%, and 20% of the previous day’s close. Circuit breakers are calculated daily. If the drop occurs before 3:25 pm, trading will be suspended for 15 minutes.