Historical facts and figures suggest that a bullish and growing economy is always followed by a bearish market trend.
On an average, if the economy has flourished for 6-10 years it is normally followed by a period of negative growth of 6 months to 2 years.
This is when a rapid decline in the prices of stocks is witnessed in the market what is known as a stock market crash.
Although the reasons for a crash are not exactly known, in general it is seen that rising stock prices over an extended period increases the optimism of the investors.
They come under the illusion that stock prices will always rise and will never fall.
The price of investments and real estate becomes sky-high.
People start spending more than they earn and investing on credit.
This economic situation causes the price-to-earnings (P/E) ratio of a stock to exceed its long-term averages.
The investors indiscriminately use margin debt.
This leads to an enormous percentage decline in market index over an extended period A crash is caused by a combination of social phenomena and external economic events.
This is because during a crash, investors have a tendency to sell off their shares all at once and do not follow the degrading economic conditions.
The stock market crash of 1929 followed the "Roaring Twenties" of 1920s.
The Dow Jones Industrial Average soared, creating an economic boom.
On October 24, 1929, the index dropped by 38 points.
Similar crash happened in 1987, where the index dropped by 508 points.
Financial markets fluctuate constantly creating new opportunities for investors.
These crashes provide investors with the reality that stock trading can be a risky business and must be done with care and caution.
Financial markets depend on computerized systems for stock prices during trading.
Breakdown of the network may lead to a panicky situation for investors.
All this and more had contributed to the economy crash of the 1920s and 1980s.
In 2008, the bankruptcy of Lehman Brothers indicated another period of the stock market crash.
The primary reason for this was the failure of financial institutions.
Securities of packaged subprime loans and credit default swaps issued led to a huge credit crunch and economic turmoil resulting in a crash.
The grave consequences of a crash are reduced consumer confidence in the growth of the economy, increased unemployment, reduced government budget due to low tax revenue, reduced demand leading to reduced wage inflation, low profitability of businesses, etc.
Other effects include increase in the number of repossessions by homeowners, reduced percentage of mortgage lending, reduced credit for consumers, decline in the pension schemes offered, salary cuts for employees, etc.
However, on a positive note, this may be an opportunity for investors to buy shares at low prices and gain profits in the long term.
During such times of economic turmoil, investors should get rid of debt and be free from credits.
It is also a good idea to have cash in hand and spend less than what is earned.
Also, investing in hard assets such as gold and precious metal can help one survive through the times of a stock market crash.
On an average, if the economy has flourished for 6-10 years it is normally followed by a period of negative growth of 6 months to 2 years.
This is when a rapid decline in the prices of stocks is witnessed in the market what is known as a stock market crash.
Although the reasons for a crash are not exactly known, in general it is seen that rising stock prices over an extended period increases the optimism of the investors.
They come under the illusion that stock prices will always rise and will never fall.
The price of investments and real estate becomes sky-high.
People start spending more than they earn and investing on credit.
This economic situation causes the price-to-earnings (P/E) ratio of a stock to exceed its long-term averages.
The investors indiscriminately use margin debt.
This leads to an enormous percentage decline in market index over an extended period A crash is caused by a combination of social phenomena and external economic events.
This is because during a crash, investors have a tendency to sell off their shares all at once and do not follow the degrading economic conditions.
The stock market crash of 1929 followed the "Roaring Twenties" of 1920s.
The Dow Jones Industrial Average soared, creating an economic boom.
On October 24, 1929, the index dropped by 38 points.
Similar crash happened in 1987, where the index dropped by 508 points.
Financial markets fluctuate constantly creating new opportunities for investors.
These crashes provide investors with the reality that stock trading can be a risky business and must be done with care and caution.
Financial markets depend on computerized systems for stock prices during trading.
Breakdown of the network may lead to a panicky situation for investors.
All this and more had contributed to the economy crash of the 1920s and 1980s.
In 2008, the bankruptcy of Lehman Brothers indicated another period of the stock market crash.
The primary reason for this was the failure of financial institutions.
Securities of packaged subprime loans and credit default swaps issued led to a huge credit crunch and economic turmoil resulting in a crash.
The grave consequences of a crash are reduced consumer confidence in the growth of the economy, increased unemployment, reduced government budget due to low tax revenue, reduced demand leading to reduced wage inflation, low profitability of businesses, etc.
Other effects include increase in the number of repossessions by homeowners, reduced percentage of mortgage lending, reduced credit for consumers, decline in the pension schemes offered, salary cuts for employees, etc.
However, on a positive note, this may be an opportunity for investors to buy shares at low prices and gain profits in the long term.
During such times of economic turmoil, investors should get rid of debt and be free from credits.
It is also a good idea to have cash in hand and spend less than what is earned.
Also, investing in hard assets such as gold and precious metal can help one survive through the times of a stock market crash.