subject: The Stock Market - How Does a Stock Market Crash? [print this page] A stock market crash is a sudden and dramatic decline of stock prices in the market. A crash usually results from mass panic. This normally occurs when people begin to hurriedly get rid of their stocks for a number of reasons such as, losing confidence in the market. A crash can also result from inflation and other underlying economic conditions and problems. A market crash can last several days or even months and has a very devastating effect on the economy. As in the case of every disaster or event, certain signs will always be there. It is therefore important for investors to be sensitive of these in order to prevent market crashes, which can take many years to recover from.
When investors are optimistic and speculative about a particular stock that is not doing well, they usually go and buy these stocks. Due to investors interest in this low trading stocks, more and more people start buying them. This causes the price of the stocks to go up, and they continue to rise as more investors buy them. The price bubble is very risky for any stock market. When investors see the bubble, they begin to panic and start selling off their stocks. In no time, everybody is trying to sell off the same stocks, hence resulting in a reduction of their prices. If this happens for various stocks at a time it could result in a market crash.
Psychological attitudes of investors can also result in a stock market crash. This happens when investors refuse to buy stocks whose prices have plummeted. The investors, for reasons of their own, choose to withdraw from the market. This causes a chain reaction in which other investors decide to sell out their stocks and pull out of the market without regard to the way the market will behave. When this happens, it results in prices going down dramatically and could result in a market crash.
Political instability or a change of government is another factor that can result in a market crash. When investors are unsure about the future of a country, they will begin to pull out of the market. Foreign investors and other big investors are usually among the first ones to pull out. When this happens, all other investors rapidly sell off their shares and pull out of the market. This especially happens when a country is facing impending war and conflicts.
