Trading in the market is highly volatile and requires a lot of knowledge and understanding to make money. Talking about the stock market, the situation remains the same. Traders have to acquire excellent skills for a favorable trade in positive and negative market conditions. The stock market crash is a negative trade situation. 

The stock market crash is a declining condition of the share market. It is the abrupt drop in stock prices that triggers a long period of a bear market or economic trouble in the future. With the article, readers will get to explore the term and its meaning in the financial market. In addition, how does the stock market crash, and why does this happen?

What is a Stock Market Crash?

The stock market is a well-known financial market, where traders buy and sell the shares of a company to earn from the difference in the price of the shares. Traders can trade in the shares via the stock exchanges or brokers, whichever they find appropriate. The company issues the stocks in the market through an initial public offering and then trades them further for a profitable trade. 

While the crash definition says that it is a situation in the market where the value of the instruments declines suddenly. This crash happens due to market changes or the volatility in the trade. 

So, when these two terms are combined, it becomes a stock market crash. 

The stock market crash definition says that it is a dramatic fall in the prices of the stocks of the market across the major cross-section of the stock market. This market condition results in loss of money value, and the crash gives a panic selling in the market and the underlying economic factors for the market traders. The crashes are followed by speculation and economic bubbles in the trade. 

Traders take several measures to prevent the stock market crash. It includes circuit breakers and trading curbs to minimize the impact of the sudden market crash.

The most famous stock market crash happened in 1929 during the great depression. Other than this, the Black Monday 1987, Dotcom bubble burst of 2001, 2008 financial crisis, and recent 2020 COVID-19 pandemic. 

Why does the Stock Market Crash?

A stock market crash happens when the shareholders of the market take the step of dumping their holdings of the stock or shares, which shifts the prices towards a decline. The crash in the market is not a good condition for the traders holding the stocks. Nevertheless, there are traders who make money from the stock market crash when predicted in advance. 

The stock market crashes because of a variety of reasons; below mentioned are some of them: 

• Bad economic news 

• War

• Terrorist attacks 

• Over Inflated economy 

• Economic market conditions 

• Disasters 

• Depressions 

• Recessions 

Traders, if they are experts of the market, can analyze the market in advance and benefit from the stock market crash. Here are certain tips that traders can execute: 

• Doing nothing, when a trader believes in the trading strategy incorporated and their portfolio, then they do nothing in a stock market crash.

• Market crashes create opportunities, and traders should buy in such situations. Traders will splurge on the stocks and funds with steep discounts and regularly buy on the set schedule. 

• Dollar-cost average the purchases

• Go for dividends 

• Moving the stock market sector from one to another 

• Buy bonds 

• Cut the losses and save tax 

How does the Stock Market Crash?

A stock market crashes because of several market reasons that have been listed above. It could be related to economic factors, a disaster, terrorist attack, recession, depression, and many other market aspects that impact the economy. As we know, a stock market crash is a large and rapid decline in stock prices. This indicates that the prices of indices double drop in a short span of time. 

The stock market correction is the term that associates with the crash in the market, that is, a drop in the stock price of at least ten percent from its recent high. In the same way, the bear market has dropped twenty percent. Whereas the bear market has a price rise by the same percentage from the previous low. 

Economic recession is often taken as the possibility of the stock market crash, although not directly related to the market. In a recession, the gross domestic product is low, and daily use commodities become expensive. 

The market has had many stock market crashes, which have led to a severe fall in the price of the stocks in the financial market. The most recent being the pandemic due to COVID-19. 

Example of Stock Market Crash

The 1970 stock market crash is a well-known example of this market condition. The stock market crash led to the worst bear market in the stock market. Beginning from October 1973, the Dow Jones Industrial Average fell 21 percent in six weeks. The reason for the stock market crash was: 

• Inflation 

• Tensions in the Middle East from the Yom Kippur War between Israel and Arab neighbors

• Nixon’s trouble presidency 

Other than this, there are other examples that could be studied online through articles, blogs, video tutorials, or educational support of the brokers such as Investby.  

Conclusion

A stock market crash is a difficult market situation that leads to panic selling of stocks in the market. This happens because of the dramatic fall in the price of the shares/stocks. With the article, traders and readers can get a brief view of the reasons for the stock market crash and why it takes place. 

Moreover, it also includes a real stock market crash example for a better understanding of the market condition. Traders can benefit from the situation if they predict it in advance but should do it carefully.