A stock market crash refers to a drastic, often unforeseen drop in the prices of stocks in the stock market. The sudden drop in stock prices may be influenced by economic conditions, catastrophic event(s), or speculative elements that sweep across the market. Most market crashes are short bursts of market downturns that can last for a single day or much longer
A stock market crash occurs when the market has entered an unstable phase, and an economic disturbance causes share prices to fall suddenly and unexpectedly.
Historical stock market crashes in the U.S. occurred in 1929, 1987, 1999-2000, 2008, and 2020
- Panic trading can be prevented by triggering market-wide circuit breakers or adopting plunge protection
The 2007/08 stock market crash was triggered by the collapse of mortgage-backed securities in the housing sector
High frequency of speculative trading caused the securities to rise and decline in value as housing prices receded
- With most homeowners unable to meet their debt obligations, financial institutions slid into bankruptcy, causing the Great Recession.
Circuit Breakers
Current guidelines by the SEC mandate a 15-minute pause in trading in certain situations, in hopes of calming the market.
Plunge Protection
Turbulent markets can also be dampened by the purchase of massive quantities of stocks by large entities when prices drop.
The Black Monday Crash of October 1987
The October 1987 market crash became known as Black Monday and is attributed to computer trading, derivative securities, over-evaluation, illiquidity, and trade and budget deficits
Understanding Market Crashes
Stock market crashes have severe effects on the economy and investors’ behavior
- The overall economy of a country depends on its stock market
- A country’s stock market trend becomes the main focus when investors intend to invest
- Most common ways investors lose money are when they sell shares following a sudden drop in market prices
The Dot-com Crash of 2000-2001
The 2000 dot-com market collapse was triggered by technology stocks
- Investors’ interest in internet related companies increased to a frenzied level following massive growth and adoption of the internet.
- Many start-up companies were able to raise millions of dollars going public via IPO’s with only a business idea.
The COVID Crash of March 2020
The market collapse in March 2020 was caused by the government’s reaction to the COVID-19 outbreak, a rapidly spreading coronavirus around the world
- The pandemic impacted many sectors worldwide, including healthcare, natural gas, food, and software.
Records of Stock Market Crashes
The first tulip market crash can be traced back to the Republic of the Netherlands between 1585 and 1650
- Prices for fashionable tulips increased to exceptionally high levels
- People mortgaged their businesses and properties to trade in tulips
- When prices peaked, and then quickly collapsed due to an outbreak of the bubonic plague, it caught speculators off guard
The Great Depression Crash of October 1929
This was the first major U.S. market crash, where speculations caused share prices to skyrocket
