A stock market crash occurs when there is a significant decline in stock prices.
Market crashes typically happen without warning, often on the heels of a long bull market run during which stock prices steadily rise. The hallmark of a stock market crash is panic-selling by investors who attempt to quickly liquidate their positions to either curb their losses or satisfy a margin call.
The Biggest Stock Market Crashes in History
1. 1929 stock market crash
The worst stock market crash in history started in 1929 and was one of the catalysts of the Great Depression.
The primary cause of the 1929 stock market crash was excessive leverage. Many individual investors and investment trusts had begun buying stocks on margin, meaning that they paid only 10% of the value of a stock to acquire it under the terms of a margin loan.
When the debt bubble burst, it caused the greatest stock market and economic crash in modern history.
2. Black Monday crash of 1987
The Black Monday crash was caused primarily by programmatic trading rather than an economic problem, the stock market recovered relatively quickly. The Dow started rebounding in November, 1987, and recouped all its losses by September of 1989.
A series of factors drove the sell-off, including a widening U.S. trade deficit, computerized trading, and tensions in the Middle East. The rise of program trading, which occurs when computers make automated trades, likely played the biggest role in this crash. The computers tended to produce more buy orders when prices were rising and more sell orders when prices fell. As those sell orders flooded the market, it caused other investors to sell in a panic.
3. Dot-com bubble of 1999-2000
During the late 1990s, the values of internet-based stocks rose sharply. As a result, the technology-dominated NASDAQ Composite Index (NASDAQINDEX:^IXIC) surged from 1,000 points in 1995 to more than 5,000 in 2000. But in early 2001, the dot-com stock bubble started to burst.
The primary cause of this crash was overvalued internet stocks. Many investors speculated that dot-com companies, even those without revenues, would one day become extremely profitable. As a result, they poured money into the sector, driving up the valuation of every company with "dot com" in its name. This stock market bubble burst when the Federal Reserve tightened its monetary policy, constraining the flow of capital. The NASDAQ did not again rise to its 2001 peak until almost 15 years later.
4. Financial crisis of 2008
In 1999, the Federal National Mortgage Association (FNMA or Fannie Mae) wanted to make home loans more accessible to those with low credit ratings and less money to spend on down payments than lenders typically required. These subprime borrowers, as they were called, were offered mortgages with payment terms, such as high interest rates and variable payment schedules, that reflected their elevated risk profiles.
This increased availability of mortgage debt appealed to both previously ineligible borrowers and investors, fueling explosive growth in mortgage originations and home sales.
Companies seeking to capitalize on the opportunities afforded by the surging economy also heavily indebted themselves.
This debt-fueled stock market started to show signs of impending collapse in March, 2007, when the investment bank Bear Stearns could not cover its losses linked to subprime mortgages.
It then took four years for the Dow to fully recover from the crash.
5. Coronavirus crash of 2020
The most recent stock market crash occurred in 2020 as COVID-19 spread worldwide. During the week of Feb. 24, the Dow Jones and S&P 500 tumbled 11% and 12%, respectively, marking the biggest weekly declines to occur since the financial crisis of 2008.
However, unlike prior crashes whose recoveries required years, the stock market rebounded back to its pre-pandemic peak by May of 2020. Fueling that rapid recovery was an enormous amount of stimulus money, with the Federal Reserve slashing interest rates and injecting $1.5 trillion into money markets and Congress passing a $2.2 trillion aid package at the end of March.
The stock market has been rocky lately, experiencing a rollercoaster of ups and downs over the last few months. Recently, the S&P 500 officially entered correction territory after falling more than 10% since the beginning of the year.
If a market crash is on the horizon, there are a few steps you can take to prepare.
1. Solidify your emergency fund
It's always wise to have at least six months' worth of savings stashed in an emergency fund.
2. Diversify your pportfolio
While most stocks will eventually recover from a market crash, not all of them will. A diversified portfolio ensures you're not putting all your eggs in one basket, making it more likely that your investments will survive a downturn.
3. Stay focused on the long term
Stock market downturns are daunting, but they're also temporary. Severe crashes could potentially lead to bear markets that last months or even years, but stock prices will recover eventually.
By keeping a long-term outlook and focusing on the market's performance over years, it will be easier to avoid getting hung up on short-term volatility.
$Tiger Brokers(TIGR)$$Futu Holdings Limited(FUTU)$$Luokung Technology Corp(LKCO)$$PayPal(PYPL)$$XPeng Inc.(XPEV)$
Comments