A stock market is simply a platform where trading of securities is done. These securities have to be listed on the stock exchange, which enables the buyer and seller to trade them. So the stock market crash is a scenario where there is a dramatic decline in the price of the stocks, resulting in significant loss of paper wealth. Though this term cannot be defined in terms of numbers, it is an economic phenomenon that occurs as a result of various external factors, investors’ and traders’ psychology and crowd behavior. Even a way too much optimistic behavioral pattern in the market might cause a stock market crash. So a stock market is highly volatile in nature. In general cases the stock market is a place of fluctuation, prices go up and come down, but when the prices go down and never comes up, especially on a large scale that’s when a stock market crashes.
Various reason for stock market crash
- When the stock prices show an increasing trend over a prolonged time
- When the parties involved in buying and selling of stocks evince too much of optimism
- When the price-earnings ratio exceed long-term averages
- All these market conditions can also lead to stock market crash
The stock market crash is just a number game that happens as a result of unprecedented demand and supply ratios. The trades of stocks in the stock exchange fix prices depending on the demand, now imagine a situation where reducing prices to induce demand doesn’t work, and before you realize that it is not a temporary phenomenon, it is a catastrophe in the stock market.
On the top of it, the state of mind plays a significant role. The panic mode of a trader contributes more to the stock market crash than the actual demand and supply itself. You find your investors are suddenly not ready to spend, you think it’s all about the price and reduce it. But still, there is no shift in the demand curve. This is where the mayhem starts, traders design attractive price patterns but nothing seems to work out. Now all his competitors are doing the same thing, tremendously lowering the prices and still if the investors stay quiet, the unexpected crash happens
Handling the situation:
Though it is not that easy to predict a crash in the stock market well in advance, there are certain symptoms that indicate a possible crash in the near future. Understanding such situations and reacting to it in a slow and steady pace will help the participants of the market save it from a crash.