The crash of the stock market is nothing less than a nightmare for the investors. Stock market crashes have also been seen many times in the Indian stock market, whether it is the crash of 2008 or 2020. Investors have lost billions of rupees from the stock market in these crashes.
Being a conscious investor, we need to be aware of the stock market crash. Today, through this article, we will tell you what is stock market crash, reason of stock market crash and what to do when stock market crashes.
What is Stock Market Crash
Well, definitely the stock market crash cannot be defined. If in the last 5 to 10 days almost all the stocks and indices have registered a huge decline then it is a signal of stock market crash.
This decline is seen in a very short time, due to which there is a recession in the stock market. Almost all the stocks appear with a red mark. Investors distance themselves from investing new money in the stock market, which further accelerates the decline.
In this way, due to the Share Market Crash, there is a bearish market situation and too many sellers of shares stand in the market.
Reasons for Stock Market Crash
There is no one reason for the stock market crash, but there can be many reasons for it. It can be expected and sometimes unexpected.
1. Causes of Global Economic Recession
Global economic recession is caused by a sharp decline in economic activity in most of the countries of the world. The movement of the economy determines the direction of the stock market. The global recession leads to a decrease in demand, which reduces production, which causes a fall in the prices of shares.
The 2008 global recession saw a sharp decline in the US stock market, which had an impact on all the important stock exchanges in the world. The Indian stock market had no exception to this.
2. Bull market causes bubble formation
When there is a tremendous boom in the stock market, all the investors try to earn more profit by investing more money. In this way the market continuously moves upwards and starts running on sentiments except earning.
In such a situation a huge bubble is formed due to overvaluation in the stock market. In the end, these bubbles burst and cause Stock Market Crash.
3. Political instability
If a situation of political instability has arisen in any country, then these are also not good signs for the stock market. Political instability creates a state of fear among the people about the condition of the country, ultimately it can be the reason for the stock market crash.
4. State of War
War is enough to ruin the economic condition of any country. Even if there is a state of war between two or more countries, then the market can move towards a crash.
Well, nowadays wars are difficult because of global sanctions. But internal and border tensions can also lead to a major downturn in the stock market.
5. Economic recession
The effect of global recession is on the whole world. Also, due to economic slowdown in a country, the economy becomes sluggish. Economic slowdown in a country can happen due to many reasons.
Continuous recessions and slow growth momentum have a direct negative impact on the stock market.
6. Natural Disaster
Due to frequent natural outbreaks such as floods, hurricanes in a country, the stock market can also lead to a crash.
Effects of Share Market Crash
A stock market crash occurs when the stock market falls by 10% or more, due to which the stock market turns into a bearish market.
- Crashes cause recession in the economy.
- Due to a sharp fall in the share prices, the wealth of the investors also falls drastically.
- The stock market crash threatens the existence of many small companies.
- Due to the decline in productivity due to the recession, many people lose their jobs.
How to take advantage of stock market crash?
If the stock market crash is seen, then there is also an opportunity for the investors, which smart investors also take advantage of. Instead of getting panic at this time, if some understanding is shown, then it can be a golden opportunity.
In a stock market crash, the prices of almost all the shares fall drastically so that they become very cheap.
But most of the investors make a big mistake when the share price is increasing continuously, they buy the shares in the hope of increasing the share price even after paying a higher price. Whereas when the same shares are getting very cheap, they shy away from buying.
Anyway the famous investor Warren Buffett has said –
“Sell when everyone is buying and you buy when everyone is selling.”
Let’s say that currently the share price of SBI is Rs 350 and due to the market crash, the value of the share has come down to Rs 150. Now would you like to buy it for Rs 350 or for Rs 150?
There is no doubt that there is a buying opportunity in a stock market crash. It doesn’t mean you buy anything. Always buy stocks that you have analyzed and whose business model you understand.
If you are buying shares in the declining market, then buy the shares according to the long term investment. In this, you buy stocks with such money which you do not need in the near future.
Shares bought without thinking can also give you a loss. Therefore, by not running after quantity consciously, always keep buying quality shares little by little.
What not to do in Share Market Crash?
You know what you should do in a stock market crash, but you should also know what you should not do in a stock market crash. The experience of a stock market crash is not new for experienced investors but can be unsettling for new investors.
Do not sell your stocks in panic in the event of a crash. If you have bought good quality stocks and you have faith in their business model then you should avoid selling your stocks in stock market crash.
Stock Market Crashes have a history that whenever there have been crashes, after that very fast recovery has been seen in the market. Therefore, do not sell good shares at a loss at all.
Neither buy nor sell shares by taking hasty decisions. As an investor, remember that during stock investing, there is bound to be a fall in the prices of shares.
Stock Market Crash Strategy
As an investor you know that stock market crashes can happen at any time. That’s why you have to make a strategy in the stock market. If you follow the right strategy then you will have minimum loss.
1. Diversify Your Portfolio
A good investor would never invest his entirety in the stock market alone. You should also invest some part of your investment as a security in a safe place like FD, Gold, PPF, Debt Fund which will work to reduce your risk in stock market crash.
Fixed interest rate investments always provide a balance to your portfolio.
2. Defensive Stocks
Always keep some defensive stocks in your stock portfolio. Defensive stocks are shares of well-known companies that are leaders in their sector. Their growth is stable, and they do not see much decline in the stock market crash. Such stocks also recover quickly after a crash.
3. Accumulating Quality Stocks
In the stock market crash, good and quality stocks are also available at low prices. This is a great opportunity for you to keep adding good stocks to your portfolio little by little.
4. Long Term Investment
Whether you need to rebalance your portfolio or buy new stocks, it is always necessary to go with the long term period as the stock market can carry a lot of risk and uncertainty in the short term.
Holding it for long term reduces your risk and your returns are also great.
Some Famous Stock Market Crashes of India
The Indian stock market has seen many crashes so far.
Crash of 1992- Due to Harshad Mehta scam on 28 April 1992, BSE had witnessed a fall of 12.77%. This crash proved to be an eye opener for the investors.
Crash of 2004- On 17 May 2004, after the NDA government lost the election and the Congress came to power, the BSE recorded a tremendous decline of 15.52% in a single day.
Crash of 2008- This crash was also seen on the Indian stock market due to the American financial crisis. This year saw a tremendous decline in the stock market continuously.
Crash of March 2020- You may have also seen these recent crashes. Due to the Corona virus crisis, there was a huge decline in the stock markets all over the world. Indian stock market also collapsed by 35 to 40% in a few days.
There is financial risk in the stock market, but the returns given by it also cannot be ignored. Stock market crashes or market declines are undesirable. Therefore, the only way to get rid of this is to always invest long term in good stocks.
Despite the stock market crash, in most cases the stock market has also shown tremendous recovery in the next one year itself. So if you invest in the stock market, you must prepare yourself for a crash. Because it is not always possible to predict when the Share Market Crash will happen.
We hope that you liked this information about What is Stock Market Crash and Stock Market Crashes in India.