Stock Market Crash
Stock market crash refers to a sudden and significant decline in the value of stocks across all sectors due to future uncertainty.
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Warren Buffet
Example
Some of the well-known stock market crashes in history are:
- The Great Depression of 1929
- Black Monday of 1987
- The dot-com bubble burst of 2001
- The financial crisis of 2008
- The crash that happened during the COVID-19 pandemic in 2020.
Triggers of Crash
Stock market crashes typically have a trigger, which can be a specific event or a combination of factors that lead to a significant decline in the value of stocks. The trigger can be anything that causes investors to lose confidence in the market:
- Black swan events: These are rare, unforeseen events that significantly impact the market. For example, the market fell drastically on the rumors about covid-19 even before it entered the USA.
- Economic factors: A weak economy, recession, excessive leverage, inflation, or rising interest rates can cause investor confidence to decline, leading to a sell-off in the stock market.
- Bubbles get burst: Overvalued stocks or excessive speculation in the market can create a bubble that bursts when investors start to sell their shares.
- Natural disasters: Natural disasters such as earthquakes, hurricanes, and pandemics can disrupt supply chains, cause economic uncertainty, and lead to a decline in the stock market.
Correction Vs. Crash
A market correction is a temporary drop in the value of stocks, usually between 10% to 20% from their recent peak, while a crash is a more severe and sudden decline, often exceeding 20% or more. A correction is usually shorter in duration, lasting several weeks to a few months, while a crash can last for a more extended period, sometimes years.
What to do during a crash?
- Stay invested: Historically, the stock market has always recovered from crashes.
- Invest More: A market downturn can create buying opportunities for high-quality stocks that have strong fundamentals and a long-term growth outlook. It’s like buying stocks at a discount.
- Don’t time the market: Don’t wait to buy at the lowest point in the stock market. No one can time the market. But instead, take advance of the dollar cost average strategy.
- Avoid panic selling: Selling stocks during a market downturn can prevent you from benefiting from the market’s eventual recovery.
- Focus on quality: Look for stocks with low debt, a competitive advantage, strong financials, and a sustainable business model.
- Stay away from risky stocks: Companies taking excessive risks or having weak financials are more likely to experience financial difficulties during stock market crash.
As Warren Buffett said, “Only when the tide goes out do you discover who’s been swimming naked.”
Stock market crash refers to a sudden and significant decline in the value of stocks across all sectors due to future uncertainty.
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Warren Buffet
Example
Some of the well-known stock market crashes in history are:
- The Great Depression of 1929
- Black Monday of 1987
- The dot-com bubble burst of 2001
- The financial crisis of 2008
- The crash that happened during the COVID-19 pandemic in 2020.
Triggers of Crash
Stock market crashes typically have a trigger, which can be a specific event or a combination of factors that lead to a significant decline in the value of stocks. The trigger can be anything that causes investors to lose confidence in the market:
- Black swan events: These are rare, unforeseen events that significantly impact the market. For example, the market fell drastically on the rumors about covid-19 even before it entered the USA.
- Economic factors: A weak economy, recession, excessive leverage, inflation, or rising interest rates can cause investor confidence to decline, leading to a sell-off in the stock market.
- Bubbles get burst: Overvalued stocks or excessive speculation in the market can create a bubble that bursts when investors start to sell their shares.
- Natural disasters: Natural disasters such as earthquakes, hurricanes, and pandemics can disrupt supply chains, cause economic uncertainty, and lead to a decline in the stock market.
Correction Vs. Crash
A market correction is a temporary drop in the value of stocks, usually between 10% to 20% from their recent peak, while a crash is a more severe and sudden decline, often exceeding 20% or more. A correction is usually shorter in duration, lasting several weeks to a few months, while a crash can last for a more extended period, sometimes years.
What to do during a crash?
- Stay invested: Historically, the stock market has always recovered from crashes.
- Invest More: A market downturn can create buying opportunities for high-quality stocks that have strong fundamentals and a long-term growth outlook. It’s like buying stocks at a discount.
- Don’t time the market: Don’t wait to buy at the lowest point in the stock market. No one can time the market. But instead, take advance of the dollar cost average strategy.
- Avoid panic selling: Selling stocks during a market downturn can prevent you from benefiting from the market’s eventual recovery.
- Focus on quality: Look for stocks with low debt, a competitive advantage, strong financials, and a sustainable business model.
- Stay away from risky stocks: Companies taking excessive risks or having weak financials are more likely to experience financial difficulties during stock market crash.
As Warren Buffett said, “Only when the tide goes out do you discover who’s been swimming naked.”