Stock Market Crash
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A Stock Market Crash may be defined as the rapid decline in the prices of stocks across a significant cross-section of any particular Stock Market. A Stock Market Crash usually occurs when all of the following socio-economic conditions come together creating a critical void.
- stock prices climbing for an extended time period
- raised levels of economic optimism
- P/E (price-to-earnings) ratio of a stock exceeding long-term averages
- market participants making comprehensive use of margin debt and leverage.
With no accurate definition available, the Stock Market Crash generally refers to outrageous percentage losses in a stock market index over a few days which commonly runs into double-digits.
During a Stock Market Crash people tend to get panicky and sell off their shares (or any kind of investment) all of a sudden and may not necessarily follow degrading economic conditions as in the case of a Bear Market.
Bear Markets are characterized with decreasing prices of stocks similar to a Stock Market Crash but employing the following strategies:
- short selling
- buying of stocks after correctly anticipating an approaching Bull Market
To understand a Stock Market Crash better one should be acquainted with the given terms:
- Speculation – to buy, maintain and sell mainly stocks besides any form of financial object in order to earn profits from the probable fluctuations in its price in contrast to buying it for personal usage or to earn profits through interests or dividends.
- Stock Market Bubble – the process of rising of the prices of stocks to the extent of those being overestimated by any appraisal of stock valuation. The Mississippi Scheme in France and the South Sea bubble in England, both of which occurred in 1720 are two of the most famous early Stock Market Bubbles.
The Wall Street Crash of 1929 that took place on October 29, 1929 in the U.S.A. is the most ill-famous example of a Stock Market Crash in history.
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