Cause crash market stocks
If anybody asks me what is the biggest nightmare for all the stock market traders and investors, I would say it is Stock Market Crash. Stock market crash is a phenomenon where stock prices of different companies listed at the stock exchange experience sudden decline. In most of cases, this decline in the stock prices is very dramatic and all the stocks of companies of all the sectors face the brunt. One of the main characteristics of the stock market crash that makes it quite devastating is the panic that is created among the investors and traders after the stock market starts slipping. There are of course certain causes behind the stock market crash.
Reasons for stock market crash
There are many reasons for which the stock market can crash and had crashed in the past.The common reason behind the stock market crash has been identified as the speculative stock market bubble. This is the process where some people with speculative intentions start buying stocks of major companies listed in the stock market and which results in stock market gaining higher points continuously. When such even occur, it is supported by large buying by domestic investors and ultimately, the stock market reaches the level where it becomes unstable. As a result, this speculative stock market bubble bursts and results in stock market crash. All those people that have been continuously buying stocks of different companies start selling them. Large overselling of such stocks results in stock market crash. In the past, this cause has been one of commonest causes of stock market crash across the globe. The reader should note that the stock market crash is basically a social phenomenon as it results due to the collective actions of various people active in the stock market.
Many experts and researchers often use the principles of crown behavior etc to find out the causes of stock market. When any stock market keeps on rising due to excessive optimism, it is bound to end with stock market crash. The stock market excessive optimism has been defined as large buying of stock levels by public at large in assumption that the stock prices would keep on increasing up to a certain level and they would able to make huge profits out of it. If technical scenario is taken into consideration, it can be said that the stock market crash occurs because the P/E ratios have become so large to exceed the long-term averages. Similarly, if there has been extensive use of margin debt in the stock market, it results in stock market crash. Excessive leverage used by the people in stock market that is provided by stock brokerage houses can also lead to stock market crashes. These are some general causes of stock market can crash too. Apart from these, there can also be some specific reasons for the crash. Let us discuss these next.
Some specific reasons
The reader should be well aware of the fact that stock market is one of most volatile markets. Since this market is largely driven by sentiments, it hardly takes any time to reach to any type of news. In the past also, there has been specific news behind the stock market crash.Let us take an example of the great stock market crash of 1929 that occurred in the United States stock markets.1920's has been recognized as one of greatest decades of prosperity in United States. Many people become millionaires in small period of time. By the year 1929, the stock market had become quite unstable due to large overbuying by the people. It had to crash and bring the levels down, which ultimately occurred. This is just an example. Many of us are aware of the stock market crash in Indian markets. The name that appeared behind the crash was Harshad Mehta, who led the speculative Bull Run and resulted in the stock market crash.
Apart from the above, the stock market crash can occur due to certain overseas reasons also, as happened recently. As we all know, it is not only the domestic buyers that buy different types of stock.There are some foreign investors also in the form of FII or Foreign Institutional Investors that put huge amount of money in the stock market. In the past few years, there are some Asian economies where levels of money invested by FII into the stock market have increased considerably. This is because these FII perceive these economies as green pastures as compared to other countries. If due to any reason, the government of any country bans the participation of FII, the stock market is likely to crash. This is exactly what happened recently in India. The controller of stock markets in India, SEBI, declared regulation of Participator notes pertaining to Foreign Institutional Investors. This created panic among all the FIIs and as a result, the stock market was down 10% to hit the lower circuit very next morning. The stock market lost all its gains in just single minute and it seemed as if stock market is going to witness the biggest crash ever. After the trading was halted just after one minute of opening, Finance Minister came forward to make some clarifications on the issue and then, market recovered. Had that step not been taken, the stock market was bound to crash. Thus, there can be some specific reasons also behind the stock market crash.
Political instability is also a factor that can bring about the stock market crash. If in any country, the government at the federal or central level becomes unstable or falls due to any reason, stock market is the first one to react and there is every likely that it would crash. This is because in such cases, FIIs, mutual funds and other such organizations are the first ones to square their positions and these are the organizations that put huge investments into the stock market. Similarly, declaration of war etc can also affect the stock market and it may lead to stock market crash.
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