What causes a Stock Market Crash/Correction?

Where does a Stock Market Crash come from?

A stock market is basically the aggregation of buyers and sellers of shares, in other words, it is a loose network of economic transactions which represents the claims of ownership on particular business or trade. Stocks can be categorized in many ways one of them is the domiciled country which has a particular company. 

Significant movements in the stock market

Geopolitical events, economic data and market sentiments all adds up to the movement of the stock market in one or the other direction. These things all play an important role in the stock market which leads to changes in supply and demand of the shares.

 

Supply in the stock market can be defined as the number of people ready to sell their shares and demand is the number of people wanting to buy the shares. Price of shares goes up when the difference between the supply (sellers) and demand (buyers) increases. This is a simple phenomenon when the demand of anything rises high the same effects its price, due to which the price increases. When more people are wanting to buy particular shares rather than selling them, the price eventually increases. Apart from this is the stock market crash which is the situation in which prices get reduced drastically in the share market which results in the significant losses of wealth.

 

 

Bull Vs Bear market

The bull market is basically the market period when prices tend to rise and this happens to improve the conditions of recession. There is hope all around changed from the feeling of despondency.

A bear market is generally the decline in the stock market over time. This is basically measured as the decline of price to about 20 % or more in a period of the last two months. A smaller decline of 10 to 20 % is considered as a stock market correction.

Here are a few of the main reasons for the downfall of the stock market and other related issues

  • Generally, investors think to buy at lower prices and sell at higher prices but they end up doing the reverse. That is buying at a higher price and selling at  a lower price.
  • There are few mistakes done by the investors which include they buy high in the state of euphoria and sell less in the state of panic or we can say fear as a result of herding instinct which causes the downfall in the market. Investors get attached to the stock position they are holding and refuse to sell no matter what, which usually ends up with the investor losing a bunch of money.
  • The prices usually become unstable when the expected negative feedback loop gets destroyed basically causing a chain reaction, due to the increase in prices this causes a increase in demand then a decrease in prices causing an increase in supply. The market is NOT stable at this time.
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Traders looking on shocked after seeing the stock market crash

All of these reasons make the downfall in the stock market. Mainly the difference in the demand and supply adds to the degradation of shares in the market too much. Further are the few mistakes done by the investors that cause the high impact on the share market as they are in a state of panic and took a wrong step. Market sentiments are the main reason for the panic among the investors which deteriorate the situation.

There are many number of reasons why the stock market would fall and a number of factors go into account. At the base of everything it comes down to supply and demand, buyers and sellers control the market ( buyers driving the price up and sellers driving the price down.) Then there are others reasons as well, a big news story, new economic data coming out, and the overall mood of investors, sometimes they just feel like selling which will cause the market to fall. There is a lot of factors that go into play in effecting the stock market, its hard to know exactly what caused a particular decline. Just be prepared, its gonna happen.

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