A global market crash is a sudden and dramatic decline in stock prices that leads to a significant loss of paper wealth for investors. While every crash has its own unique causes, many are sparked by excessive speculation and economic bubbles that burst. Government and central bank interventions, such as interest rate cuts or fiscal stimulus packages, can help stabilize the economy and rekindle investor confidence.
The 2008 crisis was triggered by the collapse of the housing bubble, poor lending practices, and inadequate financial regulation, all of which led to widespread defaults on subprime mortgages. The subsequent global recession sparked panic selling, which accelerated price declines as investors sold stocks to raise cash and avoid losses. Investors also rushed to cash in their 401(k) plans, adding to the downward pressure on prices.
In the late 1990s, enthusiasm for technology companies sent valuations soaring. But many of the new companies had no earnings or viable business models and, when reality caught up, stock prices tumbled.
The COVID-19 crash was a reminder that volatility is part of the game, and that it’s important to have a well-diversified portfolio that fits your time horizon and risk tolerance. Today’s markets have sophisticated safeguards against crashes, including circuit breakers that pause trading when stocks drop too quickly to prevent excessive sell-offs. But even with these protections, market crashes can occur when a trigger and hidden vulnerabilities collide. Trader Insight: Understanding past crashes can help you spot patterns and anticipate risk in volatile times.
About the Author
