11 May 2021

Stock Market Crash Reasons and Implications

By DICC Institute

Let’s start this article by knowing the exact definition of the stock market and stock market crash. Well as many of us are already aware of the fact that the stock market is nothing but an aggregation of buyers as well as sellers of stocks which often represent ownership claims on a various business proposal. This market is also known as the equity market, share market and so on. A stock market crash is defined as a phenomenon that takes place when stock prices across all the major sectors start falling deep that too with a rapid speed. All this will result in some global factors such as war or even scam that could easily collapse many important sectors around us. The panic nature act as a catalyst of all the investor out there making them take a wrong decision over time.

Also Read: Learning Stock Market for Beginners and Stock Market outlook 2021

This simply results in lost most of the time. The stock market sector mostly runs on sentiments and this is not at all wrong to mention that the sector is highly competitive and luck-based. There are numerous streams where people invest money to earn some benefit. So, if people believe that the new government will bring a massive change in the present economy then you call surely say that all the investors out there will feel confident and with that thing in mind, they will probably start investing in the stock market of the particular country they belong to.

Also Read: Leading and Lagging Indicators and How to trade futures commodities

Apart from this if the investor feels like something is going to cause them to lose then in such circumstances investors tend to lose all their faith and this panic modelled them to take some wrong decisions such as dumping all of their stocks. This often results in a crash of the stock market if done by a lot of investors at the same time. One this to keep in mind is that rational thinking in stock marketing will never lead to a crash. The crash is a result caused by a decision made in panic. So, the main question here is how can prevent a stock market crash. This is one of the major questions been searched by new investors all the time. Well, let’s try to understand the answer if possible. So, in the first place, there is no set formula in correspondence to avoid the crash in the stock market. Because if there would be one then till now the crashes happened in past could have been avoided for sure. But few indications can help in guessing this type of situation before its impact causes serious damages around. Let’s see each of them.

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  1. At first, if a country’s index reaches a certain high level at all the time and then doesn’t even stop as the increase is not stopped then there are certain changes that a crash will take place for sure. This is mainly said as an indication because no market just keeps on increasing without experiencing a correction in between. Also, the market mostly grows at a steady rate all the time.
  2. The second point that is worth mentioning is that the government should not indulge in wars with other countries as that creates an impact on the market.
  3. Apart from the above point government should ensure strong monitoring of the market to avoid scams.

Let’s now see the major reasons behind the stock market crash:

All these points mentioned down here are considered as the major reason and that is why always prevent as far as possible by the government and non-government authorities that are made in charge of all these affairs related to the stock market.

War:

This is the most critical and common reason behind the market crash most of the time as observed in the past. The reason is quite a few such as wars tend to increase trust issues, are kind of expensive, loss of important resources and much more than all these.

Terrorist activities:

As we already know that the terrorist attack is a global issue in today’s world.  as these type of activities increases panic situation leading to terrorist activities. Many activities in past have proven this situation to a great extent.

Trade wars:

Most of the times many countries undergo trade wars all the time. Through this type of wars, the whole economy of the country is been damaged. This thing should be avoided as much as a country could. The impact of trade wars often damages a countries reputation, economy, resources, human population etc.

Bubble burst:

This thing can be new to most of you as a bubble scenario can be explained as a situation in which the stock price of any particular sector starts to rise at a great speed. Here the earnings ratio is always high. Apart from this the index always reaches a high position all the time.

Scams:

In the past few years, it has been recognized that scams are the main reason behind these stock market crashes. This is mostly because scams lower the confidence of investors to invest their hard earn money in the share market as before even trying, they accept the fact that they will end up losing all the money they are investing. Scams are more like a negative impact on this market.

Conclusion:

Stock market crashes through a rare situation but most of them are caused due to above-listed reasons. I hope all the information mentioned above was useful.

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