In market nomenclature, a sudden and rather dramatic fall in index levels and in individual stocks is called a stock market crash.
A market crash can be short-lived or may lead to a further decline in indices and individual stocks. Therefore, it’s imperative to analyse the factors that cause a market crash.
Market movements reflect the strengths and weaknesses of the underlying economy, sector-specific trends and company-specific factors, among others. That said, markets tend to overreact to positive as well as negative developments—thanks to the greed and fear psychosis of investors.
In other words, a market crash can be momentary and may not lead to a protracted lull phase. On the contrary, a market crash can also present good buying opportunities.
If you want to understand whether a market crash is temporary or durable, then you should read more about market cycles.
Markets don’t go up or down in a straight line. They often move in cycles. An uptrend i.e. when stock prices, in general, are advancing, is called a bullish phase. A declining price trend is known as a bear market.
The answer is rather simple. Stock markets go down when they become overcrowded and overweight! What do we mean by that? A market downturn is often a consequence of unprecedented upswings that draw in lots of money and investors to markets. What starts as a sensible up-move often leads to a mad rush. And markets eventually crumble under their own weight.
Market phases don’t repeat but there are always similarities between different market phases. The reasons for a market fall or a market rise can be different each time.
For instance, the US subprime crisis and the subsequent fall of top American banks caused the global meltdown in 2008. In 2020, it was a tiny little virus. However, during both of these phases of stock market crashes, there was a commonality: to begin with, investors didn’t acknowledge the magnitude of the underlying problem.
And the difference was that the panic caused by the coronavirus pandemic was short-lived and markets recovered dramatically, whereas the economic impact of the US subprime crisis affected the global financial system structurally and showed long-term impacts.
When markets started declining in 2008, many investors thought it was a pause in a bull market. Markets made smart gains and recovered almost all their lost ground by April 2008. Complacency kicked in. The global economy deteriorated silently. The collapse of Lehman Brothers in September 2008 caught markets unaware and pushed them into total disarray. But once investors realised their mistake, markets crashed to factor in the underlying changes in economic conditions.
Contrary to this, markets had considered the coronavirus pandemic chiefly a local issue in China to begin with. But as the contagion started spreading elsewhere, markets crashed and recovered equally quickly as more information about the novel virus came to light. Unprecedented monetary support by monetary authorities across the globe calmed the market nerve.
Therefore, the key is that you should be ready with your share market stock list before stock markets crash.
Markets move in a cycle and that’s normal. When markets make linear moves—whether upward or downward—they sooner or later become overbought or oversold, respectively. Markets crash when the underlying assumptions that they work with change overnight or threaten to affect the underlying economy negatively. A market crash can present you with a great buying opportunity. Be ready with a list of stock trading in India!
Tell us which stocks you would like to buy if markets were to crash tomorrow.
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