What Happens When the Stock Market Crashes?

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    Poor Corporate Earnings

    • Poor earnings drive down stock prices.corporative business image by breezeart.us from Fotolia.com

      Before a stock market crash, you can expect corporate earnings to decline rapidly. Quarterly earning reports are watched closely by the industry, and as earnings come in below expectations, many stock analysts will issue warnings on acquiring any more stock until earnings improve. These warnings can result in many investors as well as portfolio managers selling blocks of stock in search of better investments, which can create massive sell-offs resulting in crashes within the stock market. This lack of demand drives down stock prices until earnings improve across the stock market.

    The Significance Of Euphoric Buying

    • Euphoric stock buying turns to panicked stock selling at a certain point.kursrutsch image by Rebel from Fotolia.com

      During a full "bull market," the overall stock market is climbing higher, causing stock valuations to reach unsustainable levels and become massively overvalued. Stock investors become euphoric as their investments rack up huge gains but, eventually, there is no more room to go up. At this point, buying literally dries up because there is no more stock to sell, so the market retreats from these high levels due to supply and demand. Crowd psychology takes over as euphoria quickly becomes panic amongst investors, who soon begin selling their investments and create a massive sell-off in the market and a market crash.

    Features Of Depression Among Investors in the Stock Market

    Effects Of Low Trading Volume

    Opportunity Following A Crash

    • During stock market crashes, you can find stocks at bargain prices.geld...! image by Daniel Fuhr from Fotolia.com

      One positive of a stock market crash is that it causes overvalued stock prices to fall back to more normal levels and, sometimes, at bargain levels. Value investing has been made popular by one of its premier disciples, Warren Buffett. Buffett has made a fortune of several billion dollars investing in undervalued stocks and companies by finding cheap bargains with solid earnings and assets after a corrections and crashes in the stock market. During the time when most investors are on the sidelines, it might be a good idea to search for companies with assets greater than its overall market capitalization, and hold for the long term, which is the same method used by Buffett.

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