9 Reasons for a Stock Market Crash
Stock market crashes have far-reaching consequences for both investors and society as a whole. As stock prices plunge, investors’ portfolios lose value, and firms with publicly-traded shares find it more difficult to raise funds. India and the global markets have witnessed and experienced numerous stock market crashes in the past, where the severity of each crash has been different. For instance, the 2020 Coronavirus stock market crisis only lasted a few months. On the other hand, the 1929 US stock market crash, known as the Great Depression, lasted ten years and was the biggest economic downturn in American history. Equities had lost over 90% of their value by the time it ended. The Financial Crisis of 2007-08 was another jolt to global economies. It was a result of the collapse of the US housing market and contributed to the Great Recession. The S&P 500 index dropped 51.9% in value, and the Sensex also fell by around 52%. In India, the Harshad Mehta scam in 1992 caused a crash in the stock market, and the BSE dropped 12.77%. Further, on May 17, 2004, when the UPA held a one-seat majority in the House of Commons, the BSE plunged 15.52%, the largest decrease in its history (in percentage terms).
What is a stock market crash? Different people have different meanings for a share market collapse. Mostly, people believe that when a stock market index loses more than 10% of its value in a single day, it is a crash. However, a few investors identify a crash as a significant or dramatic loss in the stock market’s value and individual share values over a short period. A stock market crash, in a nutshell, is a dramatic fall in its overall value. What are the reasons for a stock market crash? 1. Economic conditions 2. Monetary policy 3. Global economy 4. Natural/Man-made disasters 5. Speculation 6. Geopolitical factors 7. Excessive leverage 8. FII sell-offs 9. Panic selling What should you do during a stock market crash? First and foremost, do not sell out because you are panicking. It is challenging to keep your composure as your portfolio’s value plummets. Selling is rarely a winning strategy while prices are declining. Markets tend to revert over time, so selling while shares are low could result in a loss in the long run. Keep in mind that price drops might be brief, and prices can swiftly rise. Moreover, you can take the time to analyse good stocks and buy them to profit in the long run. Having a solid defensive stock mix in your portfolio is one advanced strategy. Utilities and food, for example, are examples of securities that are less affected by market disruptions. Thus, it is always recommended to have a welldiversified portfolio.
The most important way to safeguard your investments is to have a grip on your emotions during phases of massive market fluctuations. Get more detailed tips to pull through in a stock market crash in our article on ‘how to control your greed in a bull market and gain confidence in a bear market’ on the Teji Mandi blog. Over 10,000 investors trust the experts at Teji Mandi for our portfolio management services. We offer active investing advice and help you build a diverse holding of assets that helps you mitigate losses in phases of stock market turmoil. Reach out to us through our website to get started today!