Understanding how and why stock market crashes occur is an important thing for any investor to know, to ensure that they are well prepared should the worst happen.
A stock market crash occurs when there is a sudden decline in the prices of stock across a proportion of the market. Any crash will result in the loss of a significant amount of money for individuals who have invested in particular stock.
As a rule, the market will always fall quicker than it grew and this is exacerbated by everyone attempting to sell stock at the same time as there are no buyers for the stock. If there is enough of a lack of buyers, the market can crash entirely. The capitulation of the market occurs when a large number of investors leave suddenly.
Although there is no particular definition of what constitutes a crash, it is generally applied to high double-digit losses in a particular index over the course of several days.
Crashes are generally caused by several underlying economic factors and can have a profound effect on a number of different markets. They generally result in the failure of key businesses, declines in consumer wealth, significant financial commitments faced by governments and a decrease in overall economic activity.
In addition, the housing market is likely to suffer as a result, with an increase in the number of distressed and foreclosed properties
making their way on to the market.
The most recent crash occurred in 2008. The 'Black Week' started on October 6th and lasted five trading sessions, during which the Dow Jones Industrial Average fell by 18.1 per cent. Furthermore, on October 24th, many of the world's stock exchanges experienced the worst declines in their history, with drops of around ten per cent in most indices.
Both the US dollar and Japanese yen soared against other major currencies, particularly the British pound and Canadian dollar, as investors sought safe havens to store their money and ride out the crisis.
According to the Modern Medicine website, there have been a number of financial crises in US history and each of them has been followed by a period of success in the market. The news provider claims that this could mean that the period of time after a market crash is a great time to buy quality stocks.
- Wednesday 05 May 2010