Definition
The term market crash is used to describe a sudden decline in stock prices across a significant number of business sectors, resulting in a dramatic loss of investor wealth. Market crashes are oftentimes preceded by a stock market bubble.
Explanation
The stock market typically demonstrates an upward or downward trend over time. The most notable trends include bear and bull markets, which are secondary trends that can last for several years. A market crash is the sudden decline in stock prices that affects nearly all business sectors. Unlike a bull market, which happens slowly over time, a market crash typically occurs over the course of several business days. As is the case with a bear market, there is no firm definition of a stock market crash. However, the term is usually associated with a double digit percentage drop in an index such as the S&P 500 or Dow Jones Industrial Average.
Stock market crashes are thought to be the result of a combination of economic conditions and crowd psychology. For example, investor enthusiasm may push the prices of stocks well beyond their long-term average price to earnings ratios. Typically triggered by economic news, stock market crashes are oftentimes associated with panic selling. At the start of a crash, a relatively small number of investors begin selling their shares of stock. As the value of those shares fall, additional investors join in the selloff. This process continues until the market is flooded with sell orders and panic selling ensues.
Notable events include the Wall Street Crash of 1929, Black Monday in October of 1987, and the market crash of 2009, which is associated with the Great Recession.
Other Market Crashes
Cryptocurrencies are a very good example of a market crash, this is due to the volatility of the market. For example, cryptocurrency statistics say that from December 2021 to June 2022, Bitcoin price dropped from £38,000 to £20,000.
Related Terms
The term dot-com bubble refers to the rapid increase in the value of companies conducting business in the technology sector. The dot-com bubble expanded from the years 1995 through 2000, with the Nasdaq Index rising from around 1,000 to just over 5,100.
Moneyzine EditorJanuary 16th, 2024
The term catalyst refers to a disclosure that significantly impacts the value of a security. Catalysts can positively or negatively affect a security's value.Moneyzine EditorNovember 6th, 2024
The term black swan event refers to an incident of immense impact, which was not anticipated, and has a random probability of occurring. Only recognized in hindsight, individuals assume the risk of a black swan event when they invest in financial markets.Moneyzine EditorNovember 6th, 2024
The term economic bubble refers to a condition where the price of an asset moves into a range that significantly deviates from its fundamental value. Economic bubbles typically occur because of overly optimistic, or unrealistic, investor sentiment.Moneyzine EditorNovember 6th, 2024
The term gray swan event refers to an incident of sizable impact, which can be anticipated, but has a relatively low probability of occurring. Often recognized in hindsight, individuals assume the risk of a gray swan event when they invest in financial markets.Moneyzine EditorNovember 6th, 2024
