What is a Stock Market Crash?
A market crash refers to a sudden dramatic decline of stock prices around a significant cross-section of a stock market results in a loss of paper wealth. Crashes are driven by panic as much as underlying economic factors. It can often lead to economic depression. The most devasting crashes usually cause a bubble also means the over-inflated market.
Investment bubbles are made by when prices of market shares are drawn high with their exact value. According to some market theorists, a bubble is encouraged by a “herd mentality”. Where people first jump on the bandwagon of a profitable stock then when the bubble bursts, they engage in panic selling. A most famous example of this is the war during the American market crash in 1929. In the year after world war optimism in the economy inspired many to take on risky loans and invest in stocks. However, when the economy slowed down, the public began to doubt the market’s longevity and started selling their shares starts slowly and then it drops down. Market prices went into a downfall and with no fail-safe rules, the market inevitably.
The great depression was a severe worldwide economic depression that took place mostly during 1930s beginning in the United States. It was a great depression made in 20th-century worldwide. The most significant depression started in the United States after a significant fall in stock prices that began around September 4, 1929. It became worldwide news with the stock market crash of October 29, 1929, known as black Tuesday. Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. By comparison, the GDP rate falls by less than 1% from 2008 to 2009 during the great recession.
The stock spooked into decline or crash following catastrophic effects, for example, the San Francisco 1906 earthquake stopped apply for an interrogative role in the financial panic of 1906. During that time market sank to about 50% of the previous year’s valuation. Additionally in 2001 after the September 11, terrorist attacks, the stock markets were closed for almost a week. In the first five days back, the markets faced a loss of about $1.4 trillion. The digital era has also introduced new threats to the stock market in the form of “high-frequency trading”. HFT is when thousands of traders are carried out by computers in fractions of a second. The swiftness of computers programs at buying and selling puts traditional traders at a disadvantage. Also, HFT creates potential volatility in the stock markets. Computers programs that designed to respond to price points automatically can trigger mass-selling before anyone has time to react. It was said to have contributed to the 2010 flash crash after a large enough downtick in stocks caused many HFT programs to withdraw further, leading to a severe crash.
After that event, government regulators made by a new law called” circuit breakers.” Which temporarily “pause” trading if a stock falls by a certain percentage, usually 10% or more within a short time. These safeguards give traders a breathing room to reexamine their options instead of panicking and selling everything before the stock bottom out. The securities and exchange commission works hard to regulate the wild savings of the stock market. However, for the modern era, stock markets remain more volatile and susceptive to crashes than one might ever think.
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