In recent times many would-be investors simply refuse to enter the stock market, because of the risks involvedand fear of crash in stock market . . While it is true that crashes can happen, understanding what causes a crash and what the effects are can help set your mind at ease and can help you understand more about investing.
What Happens When The Stock Market Crashes?
A stock market, strangely, really begins to crash years before the actual market downturn. When the market is peaking and investors are buying and making profits, the market is commonly known as a bull market. However, as many economists point out, strong economic times are often followed by bad times. Whenever the stock market surges and profits are good, economic downturn eventually happens.
Sometimes, stock markets crash because of a specific economic or political situation. For example, in 2002, the famous Enron scandal shook investor confidence and caused a downturn in the market. More often, however, crashes are caused by nothing more than panic.
What we say that a market crashes, what we mean is that the value of stocks drops dramatically across the board. Rather than just one corporation being affected, the stocks of many or all corporations fall dramatically. This, in turn, causes investor panic and many people rush to sell their stocks. The more people try to sell their stocks lower stock value falls, making the problem worse.
Who Is Involved In A Stock Market Crash?
Many people are involved in a stock market downturn. At the base level, it is shareholders or those who own stocks who are most involved. In many cases, it is investors themselves can contribute to a crash. Investors may borrow money to buy stocks or may invest in stocks without thoroughly understanding the stock market. Investors who are not disciplined and who do not understand the market may be among the first panic and try to sell their stock, pushing a temporary downturn into an actual crash.
More significantly, however, investors are often part of speculation. This means that they buy stock in the hopes that it will increase in profit. When some sort of economic news seems to suggest that they will lose money, again, they often rush to sell their stock, driving stock prices down.Companies selling stock are also involved in the stock market crash. As their stock values drop, many companies will tighten their belts and reduce spending. Often, this can lead to job cuts and other types of cutbacks which can affect the economy overall and can reduce customer and investor confidence.
Investments and finance professionals also involved in a crash. They’re the ones that not only report the incidents to the media and explain it to reporters, but they are also the ones that people often turn to when their stocks fall.
Who Is Affected By A Crash?
In short, everyone is affected by a crash. When the stock market takes a downturn, job loss, slow GDP growth, slow economic growth, and devastated consumer confidence are often the results. Investors and companies are making less money, companies are closing, and therefore people are buying less. This affects virtually every aspect of the economy and causes overall economic depression. Since the crash often follows a bull market, many people are panicked by the sudden economic downturn and may become even more cautious with their money, which can further hinder financial growth.