Crash

Reviewed by Vishnu | Updated on Sep 30, 2020

Introduction

A crash refers to a sudden dramatic loss in value of the market, which can last for months or years. Generally, market crashes when a large number of investors invest in the stock market to such an extent that the price of the stocks inflates.

In other words, the sale price of the stocks is more than they are actually worth. Any event which can lead to this market bubble to burst can lead to a rapid decline in the market value.

Understanding Crash

A crash can be the result of both a psychological phenomenon as well as an economic one. Investors who experience a dramatic loss in any one of their stocks may choose to sell their other assets. Selling of securities on a large scale can often lead to negative investor behaviour, which may result in a rapid decline in the market value.

Also, if securities are trading at a far higher price than they are actually worth, it can lead to an economic bubble. If the bubble breaks, then the decline in value of those securities bring down the value of the entire market. This can result in a vicious spiral in the market value, eventually resulting in a crash within a few days.

Factors to Consider

  1. Unlike a bear market where the decline in value occurs over a long period, market crashes are followed by a rapid decline in the value within a number of days. This can sometimes result in a recession in the nation's overall economy.

  2. One of the most infamous market crashes occurred in the year 2007, where the stock market had dropped by over 50%. The crash also led to a severe economic downturn referred to as the Great Recession after the US housing market bubble burst, impacting economies around the world.

Related Terms

  • Tax Planning

    Tax planning is the process of analysing a financial plan or a situation from a tax perspective.   Read more


  • Prospectus

    A prospectus is defined as a legal document describing a company’s securities that have been put on sale.   Read more


  • Credit Money

    Credit money refers to a future monetary claim against an individual who has used the credit facility to buy goods and services.   Read more


  • Shariah-Compliant Funds

    Shariah-compliant funds are funds that follow the principles of Shariah law.   Read more


  • Yield

    Yield or bond yield points to the returns provided and realised by an investor on his investment over a given timeframe.   Read more


  • Green Levy

    Green levy seeks to encourage corporations to adopt eco-friendly technologies.   Read more


Recent Terms