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Stock Market Crash | Definition & Notable Stock Market Crashes

A stock market crash is a sudden and dramatic drop in the value of stocks listed on an exchange. Many factors can cause such a drop, including economic or geopolitical events, rumors or compounding herd behavior.

Stock market crashes are frequently confused with market corrections, but there are specific thresholds for each. A stock market crash refers to a drop of 20% or more from a recent high, while “correction” refers to a drop of 10% or more.

The most recent stock market crash was the 2020 crash, generally attributed to the COVID-19 pandemic. Natural gas, software, and health care stocks reported gains, while real estate, entertainment, petroleum, and hospitality stocks faltered.

In general, the best thing an investor can do when the stock market is crashing is remain calm.

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A stock market crash can occur at any time, but it tends to happen most frequently during times of economic or political turmoil. The stock market crash of 1929, which marked the start of the Great Depression, was precipitated by several factors, including decreasing economic activity, over-speculation of stocks and credit tightening by the Federal Reserve.

Crashes can have a widespread, cascading economic impact. Companies may go bankrupt or fold entirely. Some investors may lose their entire net worth in the blink of an eye, while others may be able to salvage some or all of their savings by selling off stocks before their prices drop any lower. Ultimately, a stock market crash can lead to mass layoffs and economic strife.

Although there is no set schedule for stock market crashes, they frequently seem to happen in cycles. Investors refer to this as a “boom and bust.” The US has experienced several major stock market crashes in its history, including Black Monday and the dot-com bubble burst in 2000.

Financial analysts use a range of indicators to predict when the market will start to fail, including market momentum and volume. In addition, there is usually increased media coverage around large economic events or geopolitical tensions, which can highlight the potential for further drops in the market and trigger a mass sell-off.

Stock market crashes remind investors of the fragility of the economic system and the importance of diversified investments. By understanding how stock market crashes work, investors can better prepare to avoid or mitigate potential losses in their investment portfolio.

During a stock market crash, investors are generally advised not to panic and take action to protect their portfolios. Some investors believe that a stock market crash is the best investment time, although it is possible to “catch a falling knife” by buying a stock that still has more to lose.

A stock market crash can’t be “stopped.” But, in the past, the market has been frozen and reopened during times of high volatility. Freezing the market allows investors to restructure their portfolios and hedge against some of their losses. However, it can also lock investors into less-than-favorable positions.

The most famous examples of stock market crashes throughout history include:

  • Great Depression of 1929. Caused by over-speculation of stocks and tightening of credit by the Federal Reserve, this crash led to a widespread economic depression that lasted over a decade.
  • Black Monday of 1987. Stronger-than-expected inflation numbers and a lower level of confidence from investors led to a crash that saw the Dow Jones Industrial Average drop by 22.6% in a single day.
  • dot-com crash of 2000. An over-investment in dot-com-related companies and securities led many investors to realize that dot-com startups were overvalued, causing the dot-com bubble to burst.
  • Financial crisis of 2008. Caused by the collapse of the housing market, subprime mortgage lending and repackaged housing securities, the financial crisis of 2008 caused a downturn that took the economy more than a decade to fully recover from.

These events had a profound impact on both domestic and global financial markets. In addition, there was little that individual investors could do to either anticipate or react to these events. These may be the most dramatic examples of market crashes in American history, but they are part of a much longer list of significant economic downturns.

FAQ’s

Whether an investor loses money during a stock market crash depends on their investments. Not every stock will go down during a crash. Most investors will likely lose some money if the stock market tanks – but those losses won’t be realized until the investors cash out.

A stock market crash has historically precipitated recessions. A bear market generally follows. After a crash, investors frequently put their money in staples such as gold, silver and bonds.

Many factors can lead to a stock market crash, such as economic turmoil or unsustainable stock prices. Frequently, a crash begins due to an issue with fundamentals (such as the dot-com boom, with its overpriced companies) but continues because of investor panic (as a mass sell-off begins).

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