The stock market is a volatile market. It is always in the headlines for one thing or the other. The most devastating news is the news of a stock market crash or a stock market crisis.
Firstly, a stock market crash is when the major indexes of the stock market have dipped below their average levels. The stock prices turn red and there is a panic in the market. Such a state of the stock market is a sight of confusion and stress.
A prime example of a stock market crisis is the 2009 depression. The 2009 crisis started in the US due to dysfunctionalities in the housing sector. The crisis eventually took the entire globe down. This incident marked a global bear market. There were many consequences of the same, and many lives were lost as well.
So, it is natural to wonder what causes such a stock market crisis. There are actually many reasons behind such a dip. Mostly it is the combination of one-two factors, backed by reckless finances and unregulated functions.
Basic factors
Panic
Panic among people can itself cause the market to crash. When panic emerges, people do not think rationally and buy/sell stocks in a peculiar manner. There are huge amounts of buying and selling, which disrupts the system. Panic is a factor also used by the big bulls. Big bulls are the prime players of the stock market – with huge investments. Big bulls can induce panic in the market to move the market in a particular direction.
Natural Disasters/ World Events
Any major world event has an impact on the stock market. The recent pandemic of COVID-19 has highly influenced the market. In March 2020, the markets crashed and there was a lot of confusion in the market. Throughout 2020, the levels of the market were unstable and no buyers or sellers showed predictable behaviors. So, any event that affects world affairs – affects the stock market.
Economic Crisis
Economic Crisis is the crisis caused by the mismanagement of different economic factors. It can be due to increased expenses, a budgetary flaw, or anything. Economic causes of the stock market crisis are relatively difficult to understand as these are more technical and relating to multiple factors.
Man-made Factors
Other than these three major factors, there are man-made factors as well. Any change in a major governmental decision can affect the stock market. There has been a crisis due to changes in major business corporations as well. The top 50 companies of the world have a lot of roles in such a crisis.
Deeper Exploration into Current Crisis
Of course, crises are caused by multiple interlinked factors and events. The question is, which ones?
If you’re searching for an answer, you might want to read Enough by John Bogle. John outlined not only where, but why and how market crises happen. He stated that crises are caused by unchecked financial excess – excess in financial speculation, investing fees, top execs salaries, and so on. We must shoulder the costs incurred by such excess in the form or market – and economic – crisis.
Takeaway
In the end, stock markets are and always have been quite volatile. They are vulnerable to many economic, social, and natural factors. Thus, it is necessary to keep a track of the markets in order to avoid being stuck in situations of crisis. You can not estimate the time taken to come out of a crisis – it can be anywhere from a month to years.
So, always keep a track of your investments and try to understand the behaviour of the market and its major players.