In this article, we will cover
- What is a Share Market Crash?
- Understanding the Meaning of Share Market Crash
- Causes of Share Market Crashes
- Examples of Share Market Crashes in India
- Impact of Share Market Crashes
- How to Prepare for a Share Market Crash?
The share market can be exciting and full of potential for wealth and prosperity. But what occurs when the market takes an abrupt downturn and values plummet? This is called a share market crash, which can substantially affect the economy and individual investors. Understanding the meaning and causes of a share market crash is essential for any investor. In this blog, we will examine the meaning of a share market crash and the factors that can lead to one. Therefore, fasten your seatbelts and prepare to learn about one of the most important concepts in the world of finance.
What is a Share Market Crash?
A share market crash, also known as a stock market crash, is when the overall value of a share markets index, like the Nifty 50, or BSE Sensex, drops quickly and significantly. This usually happens when many investors start selling their shares in a panic, which causes prices to keep going down. A share market crash can result in extensive financial losses and substantially affect the economy. It's important to remember that not all market downturns are crashes. Usually, a crash is a sharp and sudden drop in prices over a short period.
Understanding the Meaning of Share Market Crash
While there is no universally accepted definition of a "market crash," the word generally refers to a dramatic decline in an indicator of share prices over a day or several days. Share market crashes can devastate the economy and consumer sentiment. The share market is the lifeblood of a country's prosperity.
The direction of a country's share market is paramount to those looking to invest in the economy. In the case of a stock market crash, the most common method buyers lose money is by selling shares after a rapid decline in market values, despite having bought many shares before the crash. So, buyers lose a lot of money when the share market crashes.
Causes of Share Market Crashes
Share market crashes happen when the value of a share market index drops quickly and by a lot. This causes investors to panic and sell off their shares, which causes prices to keep going down. Many different things cause share market crashes, but here are some of the most common ones:
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Economic Factors
Things like recessions and depressions in the economy can cause share market crashes. During a recession, people spend less money, which causes corporate profits to go down and share prices to bottom. People tend to spend less when share prices go down, which can start a downward spiral.
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Political Factors
Changes in government policies can also cause share market crashes in India. Political instability, like government shutdowns, changes to tax laws, or more rules and regulations, can cause investors to lose faith, which sends the market into a panic.
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Global Events
Natural disasters, political unrest, and international conflicts can all affect the global economy and make markets unstable. For example, fear and uncertainty caused by the 9/11 terrorist attacks prompted the share market to drop sharply.
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Overvaluation
When investors get too confident and buy more shares than the market can handle, this can cause the share market to crash. This creates an artificial demand for shares, which drives up their prices more than what their basic business performance justifies. When the market estimates these shares are overvalued, it causes a crash.
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Speculation
As investors purchase and sell shares based on expectations rather than fundamentals, speculation can collapse the share market. When these hopes don't come true, investors sell their shares, which causes the prices to drop sharply. This speculation can cause share prices to change quickly and sharply, leading to a crash.
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Margin Trading
Investors use margin trading when they borrow money to buy shares, which gives them more money to spend. But if the value of the shares goes down, investors might not have enough money to pay back the loans, which could cause a rush of selling and a crash in the market.
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Insider Trading
Insider trading is when a person buys or sells shares based on information unavailable to the public. This unethical behavior can change how the market works and cause share prices to drop quickly when the news gets out.
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The Black Swans
Black swans are rare events that are hard to predict and can have big effects on the market, like the COVID-19 pandemic. You can't know when these things will happen, and their sudden appearance can cause the market to crash.
Examples of Share Market Crashes in India
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March 2020 COVID Fear
Every Indian investor and dealer knows about the March 2020 COVID-19 pandemic. Investors lost INR 12 trillion. The Sensex dropped 3,935 points and the Nifty 1,135 points on March 23. Even worse, VIX, the volatility gauge, rose 6.64% to 71.56. 2,036 of the 2,401 BSE-traded assets fell, while 233 gained. The market sank because the Indian government imposed a national shutdown on 23rd March. Markets feared a recession. Most large-cap stocks fell over 15% that day.
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Yuan Devaluation and Brexit, June 2015–2016
The June 2015–June 2016 market crash was among the worst in India and the globe. China's negative GDP, Yuan deflation, gasoline price drop, and Greek debt failure started the year-long selloff. After 2015, bond rates spiked in 2016 due to Brexit. The Indian market lost nearly INR 7 lakh crore when BSE fell 5.94% on August 24, 2015. BSE lost 26% between April 2015 and February 2016.
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March 2008 US Financial Crisis
The worst Indian market fall occurred on March 17, 2008. BSE fell 950 points (6%), dropping below 15,000. The US financial crisis—the worst since The Great Depression—caused the crash. The US home boom caused a financial crisis. The US event sent global markets tumbling. The 2008–2009 US financial crisis caused the Indian market to lose 50% of its worth.
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April 1992—Harshad Mehta Scam
BSE fell 570 points or 12.77% on April 29, 1992, and buyers removed over INR 35 billion. The Harshad Mehta 5000-crore fraud lowered the market. He was the most renowned broker of his period, and his clientele included India's most prominent citizens. His clients and millions of stock market buyers lost their assets in this stock scam. The market lost 40% of its worth after this event. To limit the harm, the government created new laws and panels.
Impact of Share Market Crashes
Share market crashes can substantially affect the economy, investors, and the general public. Here are some things that happen when the share market crashes:
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Economic Recession
A share market crash can start an economic recession, which can cause people to lose their jobs, businesses to decline in revenue, and consumers to spend less. This can cause stock prices to drop even more, making a cycle hard to break.
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Investor Losses
When the share market crashes, investors who buy stocks may suffer significant losses. Their investments can be stripped of value, leaving them considerably less money than they started. This can also cause retirement savings to go down, which can cause long-term financial trouble for some investors.
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Banking System
Share market crashes can also affect the banking system. Banks that have invested a significant amount of cash into the stock market could face significant losses. This could make it harder for businesses and people to get loans and credit.
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Confidence
A share market crash affects investors' confidence. When investors lose money, they may be less likely to invest in the stock market. It leads to a shortage in stock buying in general. This can make the market go down for a long time.
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Government Intervention
Sometimes, when the share market crashes, the government may implement policies to stabilize the market. Some of these policies are lowering interest rates, placing more money into the market, and establishing rules to stop unethical behavior.
How to Prepare for a Share Market Crash?
Preparing for a share market crash can help you limit the damage to your investments if the market goes down. Here are some things you can do to get ready for a share market crash:
- Diversify Your Investments: Diversifying your investments can help you spread the risk across different asset classes and reduce the impact of any downturns in the market.
- Invest for the Long Term: Investing for the long term can help minimize short-term fluctuations in the market and take advantage of compounding returns over time.
- Don’t Invest Without Research: Educate yourself about the different asset classes, their risks and returns, and the companies you invest in.
- Set a Stop Loss: A stop-loss order is an order to buy or sell a security once it reaches a certain price. It can help to protect your portfolio by limiting losses in the event of a downturn.
- Rebalancing Your Portfolio: Rebalancing your portfolio regularly can help to ensure that you are diversified across different asset classes and that your portfolio is aligned with your risk profile.
- Have an Emergency Fund: Having an emergency fund in place can help to protect you from unexpected financial shocks, such as a share market crash.
Conclusion
Ultimately, a share market crash is a large-scale price drop caused by overvaluation, speculation, and leverage trading. Even though the short-term effects of a crash can be devastating, you can protect yourself from the worst of it by understanding what causes it and taking steps to diversify your portfolio and prepare for downturns. Staying up-to-date on the market and planning when it changes can help weather any market storm.
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