Understanding a Stock Market Crash

Understanding a Stock Market Crash

Even though the market is bullish for an extended time, there will always be the bear rearing its ugly head.  In addition, there will always be the fear of stock market crashes.

However, what’s a stock market crash exactly?

In this article, we will talk about Forex News what a stock market crash is and the important things you need to know about it.  Read on!

What’s a stock market crash?

A stock market crash takes place when a stock index plunges more than 10 percent in just a day or two.  The indexes would also make Chart Analysis investors sell at the lowest possible prices.

Market crashes get rid of equity-investment values.  They are also the most risky to those who depend on investment returns for retirement.

Even if the fall of equity prices can happen over a day or year, crashes are more often followed by a recession or a depression.

Crashes can also result to a bear market, which could reduce 20 percent or more in the market and this such event could last for around 18 months.  This triggers a recession in most cases.

Corrections versus Crashes

The difference between a market crash and a market correction lies in the speed of the market fall.  A crash usually takes place when markets suffer from a double-digit decline a day or two. A correction, on the other hand, occurs when prices lose at least 10 percent over day, weeks, or even a couple of months.

The Reasons for a Market Crash

There are many reasons or triggers for a stock market crash to occur.  Major tragic events, economic crises, and a long-term speculative bubble falling can trigger a market crash.

Panicked sellers are also usually the one who can trigger a market crash.  In many cases, those investors who believe the market is on the verge of collapsing begin to unload their stocks to keep from losing money.

However, the speed of the share price decline quickens, and that’s when the panic starts to control the market.  This, then, compels others to do the same, ie to start selling their stocks.

Groups of people who take their money out from banks, or those who rush to sell all their stocks and other assets all at the same time, can also trigger an economic confusion or worsen any existing current economic uncertainty.

Normally, stock market crashes and panic occurs by the end of a prolonged bull market.  This is when super strong enthusiasm pushes stocks to new high levels. By this time, the prices are already higher than the actual value of the companies as measured by their earnings.

Preventing a stock market crash

There are some ways by which you can help prevent a stock market crash from happening.  You can try to implement trading curbs or circuit breakers. For large entities like companies and corporations, buying large amounts of stocks can contribute to the buoyance of the market.

Investors should keep a wee-diversified portfolio and rebalance it from time to time.  Always keep the old but gold adage in mind, which is buy low and sell high. Lastly, try your best to keep costs small.

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