scorecardresearchWhat is a stock market crash and how does it take place?

What is a stock market crash and how does it take place?

Updated: 12 May 2022, 05:45 PM IST

The stock market is highly volatile in nature where almost nothing is predictable. So, there can be several reasons that can trigger a decline in the market index. The investors must act accordingly to minimise the adverse consequences of a market fall or a crash. We shed light on the sudden fall in stock prices and its aftermaths

Investment in the stock market involves heavy risks which implies a sudden rise or dip in the prices of the shares.

Investment in the stock market involves heavy risks which implies a sudden rise or dip in the prices of the shares.

The stock market is a regulated platform that facilitates buying and selling of stocks and other financial products of companies listed there. The companies list out their multiple financial securities in the market which the investors can trade.

Investment in the stock market involves heavy risks which implies a sudden rise or dip in the prices of the shares. On certain occasions, traders claim that the share market is down and this down can be perceived in different ways. Sometimes it is a minor fall in prices, and on other occasions, it can be a drastic fall.

How does the change in prices affect investors?

A fall in stock prices is a reflection of variations in the company’s value and the belief that investors have in that company. The effect of rise or fall in the stock prices is different for both sellers and buyers. If an investor is planning to invest in a company, the fall in share prices would hold him in good stead.

On the other hand, when an investor intends to sell his stock, a decline in prices is unfavourable and will cause losses. For instance, a stock of a particular company X is priced at Rs.100 and the new price after a fall is Rs. 50, a buyer would consider this as a positive dip because it allows them to buy stocks at a comparatively low price.

Contrarily, a seller would perceive this fall as a negative one because the seller stands to lose Rs. 50 per share.

There are various factors that lead to the change in the price of stocks but often it is very complicated to define all such factors. Anyhow, one of the major reasons includes the demand for stocks.

If there is high demand for a particular stock i.e., more buyers are there in the market than sellers for that stock, then the price would rise. In contrast, if there are more sellers than buyers, then the prices would go down.

However, stock prices are also influenced by fluctuations in the country’s economy, sudden surges in interest rates, inflation and many more. If any of such major changes affect the entire stock market adversely and substantially, then it is called a stock market crash.

What leads to a stock market crash?

The stock market crash occurs owing to the sharp fall in the prices of the stocks in a short span of time. This crash or the downward spiral occurs due to factors like a failing economy, a fall in the financial markets, etc. The major reasons for price decline are listed below.

Supply and Demand – There is always a point of equilibrium between supply and demand in every market. Similarly in the stock market, when the equilibrium point alters there would be changes in the prices. If the supply for stocks is high and demand is less, there would be a fall in stock prices. If there is high demand and less supply of stocks then the stock prices boost up.

Economic conditions – Various sub-factors under this like changes in economic policy, surprising financial alterations, etc., heavily influence the demand and supply for stock. In case of abysmally low demand, the prices fall drastically and lead to a market crash.

Global economy – Every country’s economy is dependent on the global economic conditions as the countries are interdependent in terms of trading and other financial activities. For instance, the Indian market receives high investment from foreign investors and thus the global economic changes affect the investment and finally result in Indian market changes.

Despite all these potential factors causing a stock market crash at times, it is important for the investors to know that these crashes are transient and the markets generally revive in the long run.

The investors must stay calm and continue to invest in the market at least in small amounts instead of completely stepping back.

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First Published: 12 May 2022, 05:45 PM IST