A stock market crash is when a market index drops severely in a day, or a few days, of trading. The indexes are the Dow Jones Industrial Average, the Standard & Poor’s 500, and the NASDAQ.
A crash is more sudden than a stock market correction, when the market falls 10% from its 52-week high over days, weeks, or even months. In the last 40 years has had a correction (and often several) for each of the bull markets. It’s a natural part of the market cycle that wise investors welcome.
On the other hand, you also need to be aware of stock market crash. No one knows when a market crash happens. It happens in a sudden, violent, and unexpected. According to thebalance.com, here are the things you need to know.
Market Crash Causes
An unexpected economic event, catastrophe, or crisis triggers the panic. For example, the market crash of 2008 began on September 29, 2008, when the Dow fell 777.68 points.
It was the largest point drop in the history of the New York Stock Exchange at that time. Investors panicked when Congress failed to approve the bank bailout bill. They were afraid more financial institutions would go bankrupt the way Lehman Brothers had.
Crashes generally occur at the end of an extended bull market. That’s when irrational exuberance or greed has driven stock prices to unsustainable levels.
At that point, the prices are above the real worth of the companies as measured by earnings.
A new technical development has caused recent crashes. It is called as quantitative trading. “Quant analysts” use mathematical algorithms in computer programs to trade stocks.
For example is the flash crash that occurred on May 6, 2010. The Dow plummeted almost 1,000 points in just a few minutes. Quantitative trading programs were shut down due to a technical malfunction.
What Not to Do in a Crash
The stock market usually makes up the losses in the months following the crash. When the market turns up, sellers are afraid to buy again. As a result, they lock in their losses. If you sell during the crash, you will probably not buy in time to make up your losses.
Your best bet is to sell before the crash. How can you tell when the market is about to crash? There’s a feeling of “I’ve got to get in now, or I’ll miss the profits,” which leads to panicked buying. But most investors wind up buying right at the market peak. Emotion, not financials drive them.
Overall, keep a diversified portfolio of stocks, bonds, and commodities.
