The Stock Market Crash is a phenomenon that happens when the stock market falls, and panic takes over. There are a lot of causes for this, but it usually occurs because of an unexpected event or news release. A Stock Market Crash Today can be hard to recover from, so we need to take steps now in order to prevent one from happening.
What Is a Stock Market Crash?
A stock market crash is an abrupt and sometimes unpredictable decline in stock prices. A stock market collapse can be the consequence of a major calamity, economic catastrophe, or the bursting of a long-term speculative bubble. Fearful public panic about a financial crisis can exacerbate the crash, causing people to sell their assets at even greater rates.
The 1929 Great Depression, Black Monday of 1987, the 2001 dotcom bubble burst, the 2008 financial crisis, and the 2020 COVID-19 pandemic are all examples of significant stock market crashes.
What Causes a Stock Market Crash?
Historically, stock market panics have generally followed a lengthy period of economic and/or market expansion. Confidence in the economy, consistent stock increases, and low unemployment are all factors that cause bull markets. As more companies are acquired, prices rise — both for individual equities and for stock indexes.
On the other hand, Bull markets can only endure for so long before something causes the tide to turn. It might be a broad shift in sentiment, as it was in 1929, but most of the time, there’s some sort of triggering event.
A stock market can crash because of many different things.
- Panic. This is one of the prevalent reasons for a market collapse. Stockholders concerned about the value of their holdings might sell their stocks to preserve their money, and as prices fall, fear grows. Investors may panic and sell off stock at the drop of a hat due to concerns about large businesses failing, fears about the particular impact legislation might have, or even legitimate financial difficulties.
- Natural or man-made disasters. All types of calamities can occur, such as floods, wars, and epidemics. The coronavirus-induced collapse of March 2020 is a good example. As the realization of COVID-19’s dissemination began to sink in, the U.S. and other countries’ economic situations started to get bleaker.
In the face of shortages, companies cut costs by laying off and furloughing employees, and investors began selling off equities while nations imposed travel restrictions, mandatory business shutdowns, and quarantines. Consumers stockpiled on essential goods, causing shortages, triggering widespread panic.
- Economic crisis. The effects of an issue in one sector or industry frequently radiate outward. The subprime mortgage crisis, for example, began in 2007 and continued until 2008. During the early part of the decade, deregulation in the banking industry resulted in a rise in high-risk mortgage lending.
When these borrowers started defaulting on their loans, home values tumbled, and the housing market crashed. Worse, many of the now-worthless home loans had been combined and sold off to institutional investors — who had lost billions on them. Big businesses began to fail, and the stock market tumbled significantly. The Dow Jones Industrial Average dropped 3,600 points from September 19 to October 10.
- Speculation. When people and businesses invest in a sector in the hopes that an asset or security will appreciate or based on expected performance, you have speculation, which frequently leads to a bubble. If the success fails to meet expectations and the hype does not correspond with reality, the bubble bursts, triggering a mass sell-off.
What Happens When a Stock Market Crashes?
There are few definitions of what comprises a stock market collapse. A crash is defined as a stock market or a stock market index (a sample of stocks) losing more than 10% of its value in one day, according to some people. Others describe a stock market crash as a huge or dramatic loss in the market’s value, with prices of shares overall, usually within a brief time period.
In any case, a crash happens when the confidence and esteem attributed to publicly traded assets go down. This causes investors to sell their positions and move from active investing into keeping money in cash or equivalent.
A market crash’s consequences can also differ. It may be restricted on occasion. Following markets throughout Asia and across Europe, the Dow Jones Industrial Average (DJIA) and S&P 500 fell over 20% on October 19, 1987, after five years in a powerful bull market. The fall was short, and markets bounced back quickly. Within a few days, the DJIA recouped more than 43% of the points it had lost and nearly 100% of those it had lost in just over two years.
The influence of an event may be limited and shorter-lived at one time, or it might be widespread and longer-lasting at another. The Crash of 1929 is the most notorious example. On October 24, stock prices plummeted rapidly before falling further. In conclusion, the market lost more than 85% of its worth. This decline was one of the contributing factors to the Great Depression, America’s worst economic catastrophe, which lasted almost ten years.
How Do Investors Lose Money When the Stock Market Crashes?
Several significant stock market crashes have hit the American financial system throughout the last century. Stock prices fell to 10% of their prior highs during the Great Depression in 1929, and they dropped more than 20% in a day during the 1987 crash.
- Selling After a Crash
Investors might lose a large amount of money if they don’t understand how changing share prices influence their net worth. In the simplest sense, investors acquire shares at a particular price and may then sell them to gain capital gains. However, if declining investor interest and a drop in the stock’s perceived value result in a substantial price decrease, the investor will not see any return.
Assume that an investor purchases 1,000 shares in a firm for $1,000. The price of the company’s stock falls by 75% as a result of the market collapse. Because of this, the investor’s portfolio drops from 1,000 shares worth $1,000 to 1,000 shares worth $250. If the buyer closes a long position before expiration, they will suffer a net loss of $750. However, If the investor doesn’t panic and keeps the money in the investment, there’s a good chance they’ll be able to recoup their losses when the market starts to recover.
- Buying on Margin
Buying on margin is another way for an investor to lose a lot of money in a decline in the stock market. Investors borrow money using this investment technique to make a profit. An investor employs borrowed funds to make a profit on tiny stock market gains by combining their own money with a large amount of borrowed cash. After the stock is sold and the loan and interest are repaid, a little profit will remain.
If an investor borrows $999 from a bank at 5% interest and combines it with $1 of their own savings, they will have $1,000 accessible for investment purposes. If that amount is invested in a stock that provides a 6% return, the investor will receive a total of $1,060. After paying off the loan (including interest), the end result is that about $11 remains as profit. This would represent a more than 1,000 percent return based on the investor’s personal investment of $1.
This plan surely works if the market goes up, but if the market crashes, the investor will be in a lot of trouble. The situation is compounded when the value of the investment drops below $1,000. For example, if the investor’s share value falls to $100, they will lose their own dollar and owe more than $950 to the bank (that’s $950 in debt on a first-dollar investment).
What to Do During a Stock Market Crash
In 2021, if the market crashes again, keep in mind that you just went through one last year. In the midst of turmoil, you must concentrate on what you can influence: your attitude, outlook, and behavior. Of course, a collapse is alarming. In the future, you might have to make changes. But with a plan, we can move forward. Here are the things you can do if the stock market crashes:
Refuse to Panic
As previously said, panic can make a decline just as devastating as the economic problems we’re facing. Don’t be fooled. Uncertainty causes anxiety, and fear unchecked may develop if you face the unknown. Choose to keep your head clear and upbeat by keeping your thoughts positive.
Cut Back on Everything
You can’t influence how Congress makes its budget, but you can impact your own. If the economy fails, it means it’s time to cut back on all unneeded expenditures of any sort. Cancel your gym membership and avoid online shopping at all costs! Make a meal plan to save money. Before going out to purchase more food, use up what you have in the house. When you’re out, only purchase what’s on your list.
Before anything else, make sure the Four Walls are taken care of.
Protect your family by saving money. You can do this!
Follow the Proven Plan
The Baby Steps don’t change, whether it’s raining or not. They’re the tried-and-true method for managing your money, and they work! You must first understand which step you are on before proceeding with the strategy.
If you’ve lost your income: Concentrate on amassing as much money as possible. You may put a stop to paying extra toward debt right now. It stinks, but don’t worry; it isn’t for good. When the tough times are over—which they will be—you’ll be able to resume making payments and paying off your loans.
If you’re making a consistent income: Keep working the Baby Steps just as you were, and don’t stop your debt snowballing. Stick to the plan!
If You’re Investing, Stay Invested
Continue to invest 15% of your salary (or more if you need to halt for a while due to a loss in income). When the market falls, many individuals are tempted to sell their 401(k) or mutual funds before they “lose any more money.” If you sell now, you’ll guarantee a loss. Continue to stay engaged and ride it out in order to give your investments more time to develop and recover. Don’t try to predict the market. Concentrate on how long you’ve been in the market.
Meet with an Investment Professional
If there are big changes in the market, please speak with your investment advisor. You need particular advice for your situation—your age, how much money you have saved up, and which Baby Step you are on. Make sure you get expert help if your car has been in a crash. Don’t be scared to voice your opinions. Make a strategy for how you’ll move forward as a couple.
If you’re new to the game of investing, don’t be afraid to enlist the help of a professional. Connect with a local investment expert.
3 Stocks to Buy if a Market Crash Does Occur
Consider purchasing shares of Visa, a payment processor. It’s a firm that benefits greatly from the steady growth of U.S. and worldwide gross domestic product. Because booms last far longer than recessions, Visa is able to take advantage of increased consumer and business spending.
It’s also worth noting that Visa isn’t a lender. It stays true to its primary role as the leading provider of payment network services in the United States and across the world. Since it does not lend, Visa will not have to set aside money if credit card defaults rise during a recession or depression. This is part of the main reasons why Visa’s profit margin is frequently greater than 50% and why it bounces back much more quickly than other financial services companies.
Robotic-assisted surgical system developer Intuitive Surgical is a second no-brainer purchase during a stock market crisis. There’s a continual demand for healthcare firms that provide medicines, technologies, and operating systems, as you don’t get to choose when you become sick or what illness(s) you acquire.
Intuitive Surgical’s dominance of the assisted surgical environment and improving operating margins are what set it apart. No other company comes close to its 6,335 da Vinci surgical systems installed base is one example of its domination in this area. Between the high price of these systems ($500,000 to $2.5 million) and the hours of training given to surgeons, da Vinci buyers are more than likely to become long-term clients.
Intuitive Surgical’s operating margins are positioned to improve over time. That’s because, in addition to selling surgical instruments and accessories with each operation and servicing its robotic systems, generating better margins than truly offering the da Vinci surgical system. As its installed base expands, so will its operating margins.
Finally, investors may purchase shares in Duke Energy if the market becomes more volatile and the broader market is declining.
The transparency of a utility’s cash flow and prospects is what makes it so appealing. This implies that demand for electricity doesn’t vary dramatically from year to year, which results in predictable profits and market-topping dividend yields. Duke Energy investors are earning a healthy 3.7 percent yield right now.
The fact that the firm plans to spend $58 billion to $60 billion on new infrastructure projects between 2020 and 2024 are what really distinguishes Duke Energy as an exciting investment. The majority of this spending will be on renewable energy, which will lower the company’s electrical generation costs and speed up its growth rate.
Duke’s conversion to more ecologically beneficial technologies will benefit investors as the United States moves toward a greener economy to combat climate change.
Can a Stock Market Crash be Prevented?
There’s no way to prevent the stock market from plummeting. On the other hand, governments have implemented safeguards to avoid large drops and upheavals in market stability.
The circuit breaker, established following the 1987 crisis, is one approach. Trading in all U.S. stock markets is halted if the S&P 500 Index falls 7% or more from the previous day’s close. In the case of a more significant drop, trading could be stopped for 15 minutes or the rest of the day, depending on how bad it is. This measure is intended to give analysts and investors time to get enough accurate information before making trade selections.
Large amounts of stocks may also be bought by private investors to try and stabilize the market. In fact, a century ago, this was quite successful in abbreviating the Panics of 1873 and 1907. The federal government can lower interest rates to entice individuals to borrow and acquire stock.
Even with all of these mitigating circumstances, crashes still occur.
When the economy is struggling, it’s vital to be prepared for anything. Of course, things will always improve eventually, therefore keep some strong stocks in your portfolio just in case the market takes a downturn as it has many times before throughout history.
Despite the fact that a market crash is frightening, it will ultimately pass. All you have to do now is invest cautiously in order to reduce your chances and keep an eye on the economy.