How do you know that a stock market crash has occurred? You can make that out when you see a sharp and a sudden fall in the price through the stock indices. Many of the investors believe that a market crash happens when the stock prices fall by more than 10 percent on a single day.
There are many factors that could lead to a stock market crash but this crash does not happen on a single day. This is caused by panic that has been created for days and one sudden day there is massive selling in the market.
Look out for these events
If the market is already very shaky then all that it needs some major news that could cause a huge crash. The investors feel that the market is about to go down soon and so they sell off all their shares. This causes the other investors to follow suit and the trend goes on until the stock prices drop to a great level. Those who are still holding on to the stock see that the value of the stocks has plummeted.
The margin calls by the brokerage firms add to this crash. The investors who were trading on margins heavily have no choice but to liquidate their portfolio. This causes the supply to increase and the demand comes down and one can see this fall across the stock indices.
What could be a contributing factor to the fall?
The stock prices can be inflated because there was a lot of optimism among the investors. This creates a bubble as there is no fundamental backing that justifies this sharp rally in prices. The bubble then causes to burst and the price of the stock drops back to its original value. The investors have taken more risk because they have borrowed money to trade and this forces them to sell in the market.
There could also be some in-world event that leads to the crash. There are a lot of information float in the ground and thus more and more investors are looking to sell off their portfolio. Computer trading also contributes to the price fall because of these run on an algorithm. Thus anything that triggers a sell in the algorithm makes the computer sell the stocks in bulk.
This reduces the value of the stocks that you hold
The stock market crash reduces the value of the stocks that you are holding. This could have a major impact especially if you are depending on this income for your retirement days. Also, many of them see the stock market as an indicator of the health of the economy and the stock market crash leads to a reduction in spending. This lets the economy go even slower.
What can you do about it
It makes sense to be prepared for this stock market crash. Look out for the above signs and if you see them then start getting out of the stocks in your portfolio slowly. In this way, you will save yourself from any last minute panic.