Reviewed by Sep 30, 2020| Updated on
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.
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
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.
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.
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