Stock Market Crashes and Bubbles

In the investing world, there are many terms you’ll need to learn. You’ve probably heard of most of them already, but may be wondering just what are stock market crashes and bubbles?

Stock Market Crash

A stock market crash is defined as ‘a sudden dramatic decline of stock prices....resulting in a significant loss of wealth' (Wikipedia). So in other words, it is when stocks of many different companies quickly decline a substantial amount and investors lose a lot of cash. Some of the more well-known stock market crashes are:

· The Wall Street Crash of October 1929, also known as Black Tuesday which led to the Great Depression

· Black Monday in October 1987. This crash started in Hong Kong and then spread to Europe and the US

· The crash of 2008-2009, starting in September 2008 by large banks failing in the United States.

What Causes a Crash?

Stock market crashes take place when there are more buyers than sellers in the market. The majority of people's stock price has gone down so low that they are scrambling to sell it, but nobody is buying it.

There have been smaller crashes in recent history than the ones mentioned above. Most of the time, crashes are caused by wide-spread panic. There could be rumors or trends that lead the population to believe that their stock is going to plummet.

So they start selling, then the price goes down, and then more and more people sell their stock until there are no buyers left. It can take a while for the market to recover from crashes.

Stock Market Bubble

On the opposite end of the spectrum, a stock market bubble happens when there is a ‘rapid escalation of asset prices followed by a contraction' (Investopedia).

In laymen’s terms, the stock price goes up so high it exceeds its own value.

A bubble is often caused by investors demanding a certain stock.

Like a crash, it’s caused by mob mentality. When a new toy becomes all the rage at Christmas, every parent wants to buy one.

The stock price goes up as people are willing to pay a ridiculously high amount for something.

When all the hype dies down, though, the stock has nowhere to go but down.

It’s called a bubble because it’s bound to pop sometime.

This is what causes the contraction as the stock price goes down to what it was before the bubble.

Some other names of a stock market bubble are:

· An economic bubble

· An asset bubble

· Speculative bubble

· Market bubble

· Price bubble

· Financial bubble

Will Stock Market Crashes and Bubbles Affect Me?

Yes, they might affect your investments, but there is a small chance that this will happen.

The market naturally flows up and down, but crashes and bubbles are pretty rare.

Crashes are primarily caused by banks losing money, and as long as you don't get caught up in the market craze of a bubble you should be fine.

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