What Causes a Stock Market Crash?

A stock market crash is a disaster which is feared by all investors in the stock market. When it happens the financial world is thrown into panic, because many people could lose huge amounts of money, possibly even all of their life savings, as a result. What is it that leads up to this nightmare of a situation?

You can usually predict, well before the event, that a stock market crash is going to happen. There are certain events which happen prior to the crash, and which lead up to it. To begin with the market is quite weak, a situation which is known as a bear market. When this happens many people are eager to invest in shares, believing that the value of those shares is bound to rise and therefore make them a good profit. This interest in the market does indeed cause the share values to rise, and the market becomes a bull market, in other words an especially strong one.

Mutual funds are an especially popular type of investment at this point in the investment cycle. The market is quite stable at this stage, and there are good profits to be had from investment in this early part of the cycle.

More investors join in at this stable part of the investment cycle, as investors are encouraged to buy and to increase their profit in the stock market.

Companies release stocks onto the market during the bull market phase, and it is common for IPOs or Initial Public Offerings to be available in this period before a stock market crash. Companies do very well out of this situation, with the value of their stocks rising steeply, and great confidence from investors in the value of their stocks. More and more money is being invested by people who want to be the first to buy stocks in a particular company.

Those investors who bought shares in the beginning phase of the cycle are now keen to sell them, before they lose their money, knowing that the value of their shares will soon go down. Sometimes during a bull market there can also be various scandals and scams on a corporate level, because people become greedy. The market is becoming flooded with stocks, and yet people feel that the values of stocks will continue to rise.

Eventually the stock market reaches the point where people have invested so much it is 'overbought', and the only way to go is down. This is the beginning of the stock market crash. Stocks start to lose value, and when people become aware of this fact, they then want to sell, and before you know it everyone is selling rather than buying, and this brings about the stock market crash.

There have been a number of notable stock market crashes in history: the Wall Street crash of 1929, the Black Monday crash in 1987.

For the crash of 1929, the economy had been growing through the 1920s at a pace. It was a technological age that saw the arrival of radio, cars, planes, telephone and a power national grid. Companies who had pioneered these advances like the Radio Corporation of America (RCA), and General Motors saw the value of their stocks soar. Financial corporations also did well as Wall Street bankers floated Mutual Fund companies like the Goldman Sachs Trading Corporation. Investors were infatuated with the returns available in the stock market. As the Autumn of 1929 rolled on, declines in the stock market were experienced and this was followed swiftly by Black Monday on 28th October and Black Tuesday on the 29th October. In all the Dow Jones lost 89% of its value before an upturn in the index occurred in 1932.

Similarly, the mid-1980s were a time of strong economic optimism. From August 1982 to its peak in August 1987, the Dow Jones Industrial Average (DJIA) grew from 776 to 2722. The rise in market indices for the 19 largest markets in the world averaged 296 percent during this period. The crash on Black Monday, saw the Dow Jones Industrials Average plummeted 508 points, losing 22.6% of its value in one day. The Standard and Poor dropped 20.4%, falling from 282.7 to 225.06. The NASDAQ Composite lost only 11.3% not because of restraint on the part of sellers but because the NASDAQ market system failed.

Therefore, monitor the financial press and news regularly to alert yourself to what is happening in the stock market world. There are means of making a profit when the stocks are heading south, but this will the subject of another article.

I hope that you found this summary information of value. I recommend that you click on the ads and the links to find the answer to your question.

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