How Does A Stock Market Crash Occur The Basics
There is no doubt that a bad economy can take its toll on people. While we may not be at our lowest point, most of us are feeling the effects of our struggling economy in one way or another. At least, for now, the stock market seems to be running full steam ahead. There have been times in the past when the stock market has crashed, and that leads to devastating loss on both a personal and national scale. But, how does a stock market crash occur?
Before we can answer that we need to look at the definition of what a crash is. What may surprise you is that there is no specific definition that all economists agree on. However, the general definition of a stock market crash is when there is a double digit percentage loss across the market. This loss takes place in only a few days, as opposed to the several months or years associated with the typical bear market.
Most people assume that the answer to "how does the stock market crash occur" is based on actual events. There is some truth to this, and it certainly can be a factor that leads to a crash, but there have been enough examples of bad events happening with no resultant crash, that it is clear there is something more going on.
The driving factor in most stock market crashes is panic. This panic may be caused, in part, by some event, but more often than not there is no logical basis for it. For whatever reason, a few investors get skittish, and start selling on a large portion of stock at a reduced price. Then other investors take notice, and they to start selling; thinking that there is an actual event driving this selloff at lower prices. Once this selling off that's the mainstream investors, a crash ensues.
What we're really looking at here, isn't anything based on logic. Instead, it's an economic Domino effect. Again, it's always possible that there is some event that causes the initial selloff by the few investors, but that's not enough to explain the overall crash. For example, let's say there is a skirmish in a Middle Eastern country that is a large supplier of the world's oil. A few investors get nervous about some of their holdings, and decide it's better to sell at a loss now than to risk an even greater loss in the future. However there is no real way for them to know which way any particular stock is going to go, and yet they believe they are taking an educated risk.
Then, as other investors get wind of this mini-selloff they decide to start selling their stocks because they now perceived a real problem; even though there really isn't one. And that's the basic answer to how does a stock market crash occur.
