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Understanding the Dangers of a Stock Market Crash

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  • Understanding the Dangers of a Stock Market Crash

    A stock market crash is defined as sudden steep decline in stocks prices on the stock market. While there are no particular set of rules for what defines a crash, it is generally said to occur when the percentage of loss is steep with double digits over a period of a week. They are normally caused by a combination of panic and economic factors. It may follow after a long term of positive expectations and continued price increases in stocks, or if too much borrowed money placed in the markets is not repaid. When investors feel concern or fear of a possible loss because of these conditions, it may trigger panic with mass selling of stocks.

    This mass hysteria and negative sentiment on the stock market fuels a craze of selling which keeps on driving stock prices down, thus causing the stock index to suffer. Bear markets are a period where declining stock prices occur over a period of time, sometimes months or years. However, a stock market crash is often sudden and dramatic occurring over several days. Over the decades, there have been a number of crashes that have taken place, some being more severe than others.

    One of the most famous and well known crashes was the Wall Street crash of 1929. Following a decade of prosperity, a time also referred to as the roaring twenties, speculation was high that the markets could sustain these levels. However, this was not to be the case. On October 29, 1929, also known as Black Tuesday, the stock markets plummeted and continued to decline unrelentingly for a month. The days and months that followed had brief periods where the market rose during trading.

    The Dow Jones even managed to claw its way back up partially between November 1929 and early 1930s. This was short lived and it crashed again entering a bear market and reaching its lowest point in July of 1932. This was the time of the great depression, in a decade that preceded World War 2. The Dow was only able to return to its pre 1929 levels after 25 years.

    This economic bubble was created when Americans where investing heavily, with many borrowing money to buy stocks. It reached a point where there was over $8.5 billion in loans, an amount which was more than all the US currency circulating the country. The stock market crash that ensued is the worst to be recorded in the 20th century.

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