The reasons for the stock market crash
The main financial transactions are carried out with the stock exchange. This is a market dedicated to buying and selling shares (capital shares) of this or that company: Facebook, Alibaba, Toyota moto, Volkswagen, etc. Thus, the economies of industrialized countries, where almost all of these multinational firms are based, are closely dependent on the stock exchange. Moreover, the stock market crash of 1929 highlighted the fragility of the economies of the rich countries. But what exactly does the term stock market crash mean? What are the main causes of this phenomenon? How can we protect ourselves from the vagaries of the stock market? All the answers in a few lines.
The stock market crash, a devastating financial crisis for the economy
In simple terms, a stock market crash means a sudden drop in the stock market. This crisis manifests itself in a sharp fall in the value of company shares. For speculators and even for the state, this is a catastrophic situation. Indeed, shares quickly lose half their value or even more. People who invested money and savings to buy these shares have therefore lost everything. Many companies go bankrupt. In other words, a stock market crash is a crisis that damages a country’s economy. As a result of globalisation, this financial disaster is gradually affecting other states. In the end, it is the households that have invested money in companies that are the main victims. Would you like more information on the stock market crash? Then click here.
Focus on the main causes of the stock market crash
Several phenomena are at the origin of the stock market crash:
– the mismatch between supply and demand in the stock market…
The size of the sale relative to the purchase leads to a decrease in share prices. The situation is struggling to stabilize, hence the continued decline in the values of listed companies.
– occurrence specific event
During major events such as the terrorist attacks in 2001, speculators on the stock market panic and decide to sell their shares. Others follow suit, resulting in a sharp increase in the sale of shares. The balance between supply and demand is no longer respected, resulting in a fall in the stock market.
– the multiplication of imprudent financial practices
Speculators and private individuals make large or even exaggerated investments in this or that company. The financial risks are therefore enormous, resulting in unreasonable panic in every situation: change in the management of a company, merger of a company, political crisis, etc.
– the imprudence of banks when granting loans
In industrialized countries, there is a real laxity in terms of borrowing conditions. Indeed, individuals who want to invest in the stock market easily receive money from financial institutions. There are many buyers, resulting in a considerable increase in the value of the shares while the return on investment is lower. Faced with this situation, speculators decide to suddenly sell their shares in the company. The domino effect is set in motion, resulting in a stock market crash.
Measures to be taken to protect against a stock market crash
Generally speaking, when a stock market crash occurs, all speculators are severely impacted. The objective is therefore to limit the effects of the crash on your portfolio.
Several techniques can be used to protect yourself against these financial crises. First of all, you should invest your money in many companies rather than just one. Indeed, a large investment carries an enormous risk of loss. By buying the shares of a dozen companies, you spread the possible losses. The other technique is to invest in the stock exchanges of different countries. For example, if you invest all your money in the New York Stock Exchange, you risk losing everything if a stock market crash occurs there. While investing simultaneously in the New York, London and Shanghai stock exchanges, the risks are minimal. Caution is also required when speculating on the stock market. It is better to invest gradually according to the situation (rise or fall in the value of the shares) rather than betting everything.
Diversification is also an excellent way to limit the effects of the stock market crash. The idea is to invest in several areas: equities, gold and bonds. In fact, the value of these last two assets is more stable.
Stock market speculation is often perceived as a way to make money easily. However, it is a risky operation. Caution is therefore required when carrying out financial transactions.