A stock market crash happens when a stock index drops severely in a day or two of trading. Market volatility is a fact of life in the share market, the prices of equities and broader indices rise and fall resulting in market witnessing a turbulent fluctuation over the short term as well as long term. A stock market crash arises when indices experience a rapid double-digit decline. There is as such no specific decline percentage that can precisely define a stock market crash today, unlike bull market and bear market.
Why share market crash occurs?
Usually, a stock market crash occurs at a time when the economy is overheated, the inflation is increasing, when market speculation is high and when there is strong uncertainty over the direction of an economy. Due to these, the stock market crash often starts with a trickle and ends as a disaster as the investors look for a quick quit or exit option. Because of the formidable interaction of bull market, bear market, and stock market bubble, it can crash in unfortunate ways.
- Bull Market: It occurs when the investors are optimistic about the market and the economy also, when the demand is more than supply resulting in an increase in share prices. It can last from 2-9 years. All it requires is a significant market event to create crisis of confidence and drawing more sellers in the market.
- Bear Market: It often evolves after the stock market crash. In this, the investors go pessimistic and start selling the shares resulting in a fall of prices as supply begins to outpace demand. It is referred to as a bear market as the result of the stock market losing 20% of its value over a 52 week period. It mostly lasts for about 4 years or less.
- Stock Market Bubble: It inflates and explodes when investors start acting in a herd mentality and tend to buy stocks in a group leading to inflated and unrealistically high market prices.
Effects of stock market crash:
The stock crash can lead to a bear market i.e. when the market falls by 10 percent beyond a correction for a total decline of 20 percent or more. Stock market crash can result in recession. In case the stock prices fall dramatically, the corporates have less ability to grow which will result in insolvency. A drop in demand ultimately leads to less revenue resulting in more workers to be laid off hence, the declining continues and the economy contracts resulting in creation of recession.
What is to be done during and after a stock market crash?
All you require is to be aware of your own exposure to the market and check whether you are highly leveraged as a margin investor. Also, see whether your investment portfolio is over weighted with riskier growth stocks or other more speculative stocks. Therefore, have complete in-depth knowledge about your portfolio and with the help of stock market professionals take the following steps:
- Adjust accordingly after researching about good stocks
- Spread your risk by diversifying your portfolio
- Buy when others sell
- Stay calm as bear markets tend to dissipate fairly quickly and bull markets last a lot longer
Stock market crash 2019
Sensex fell by 793 points. The main reasons behind the biggest stock market crash 2019 till now are:
- US jobs data came stronger than expected thus, dampening of hopes for aggressive rate cuts by the US Fed.
- No stimulus package to kick start the economy
- Surcharge on high-income earners
- PNB borrowings fraud
- The minimum public shareholding limit may be revised as proposed in Budget 2019
A slowdown in the economy and the weak corporate earnings growth could keep Indian markets under pressure for some time.