How Does A Stock Market Crash Occur

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A simple explanation for how a stock market crash occurs can be found here. It all boils down to a loss of market confidence, which can be caused by a variety of circumstances. To find out "how does a stock market crash?" we need to look at those elements.

If market confidence is low, it's critical to consider both why and how. Does a stock market crash merely because a few people say so? Rarely, but if those persons are large investors who suddenly make negative comments in the media, they could cause a market meltdown.

Those remarks could be the outcome of bad economic forecasts or lower-than-expected sector results. It is not so much what triggers the first selling that drives the market as it is how the more substantial investors react. Ordinary investors are attracted to the "herd instinct" when they witness prominent players abandoning stocks and shares of larger companies. It is, even if they are unsure that something is amiss, they feel that others are aware of something they are unaware of and begin to respond without thinking.

If institutional investors believe a market segment is overvalued, they may opt to take their profits and flee. That alone might trigger panic if tiny investors rush to get out at the same moment, leaving fewer and fewer people willing to retain the stock.

This blind panic reaction has been a source of market crashes since the introduction of computers in stock market transactions. Because the computers are set to react to price drops of a given percentage, the traders will be prompted to sell as well. So, what happens next? Other computers and traders receive indications that the market for the shares has collapsed, causing them to sell, and the frenzy continues to increase as each set of selling signals feeds the next round of price decreases.

The main stock exchanges are so concerned about this programmed selling cycle that they have put in place procedures to shut down the markets if prices fall below a certain level in a specific time frame.

You can see how a lack of confidence, whether genuine or perceived, might be the solution to the question of how does a stock market fall happens.


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