The Most Commonly Cited Reasons for Stock Market Crashes

A stock market crash is a sudden, steep decline in stock prices. Various factors can cause crashes, and it’s challenging to predict when one is about to happen. Keep reading to learn about the most common causes of stock market crashes.

Political or Economic Instability

Political instability is one of the most commonly cited reasons for stock market crashes. When a country is in political turmoil, the government may not be able to make decisions that are in the best interest of the economy, which can lead to a decrease in investor confidence and a stock market crash. Additionally, when a country experiences political instability can often lead to social unrest and violence. This can also scare investors away from the stock market, leading to a crash. Investors use Finance charts, which are graphical representations of the performance of a security or financial market over time, to keep tabs on the market amid times of instability. An interactive stock chart relects interest rate hikes, crashes, and other insights. They can give investors a snapshot of how a particular investment has performed over a certain period and can help to indicate when it may be time to sell or buy.

Manipulation of the Market

Stock market crashes are sometimes preceded by periods of market manipulation. Market manipulation is the act of artificially affecting the price of a security or a commodity. There are many different types of market manipulation, but the most common type is price manipulation. Price manipulation can be done in several ways, but the most common is using false or misleading information. When a company or individual manipulates the price of a security, they are essentially creating a false market. This false market can lead to many problems, including a stock market crash.

Panic Selling

Panic selling is the sudden and mass sale of securities or other assets in a panic. Investors often panic and sell their stocks when they hear bad news or when the stock market is crashing, which can cause the stock market to crash even further. For example, in October 2008, the stock market crashed when Lehman Brothers went bankrupt. Investors panicked and sold their stocks, which caused the stock market to crash further.

Panic buying may also occur during economic turmoil, after a natural disaster, or in times of extreme inflation or deflation. Inflation refers to a general increase in prices over time. Deflation is the opposite—a decrease in prices over time. Both can have adverse effects on the stock market. When inflation rises, companies may have to raise prices to maintain profit margins, which can lead investors to sell stocks out of fear that the company will not be able to grow its business fast enough. Deflation can also cause investors to panic as falling prices make it harder for companies to repay debt and result in lower corporate earnings.

Corporate fraud and corruption

When a publicly traded company commits fraud, it can cause significant problems in the stock market. The company’s management may “cook the books,” misrepresenting the company’s financial situation to make it look healthier than it really is. Investors may buy stock in the company based on these false representations, only to see the stock price plummet when the fraud is revealed. This can cause a stock market crash, as investors sell off their holdings in other companies to protect their investment in the fraudulent company.

Corporate fraud can also lead to corruption. Management may be more interested in lining their own pockets than responsibly running the company. This can lead to accounting scandals, bribery, and other illegal activities. This can further damage the company’s reputation and cause the stock price to fall. When a company is caught up in a fraud or corruption scandal, it can be difficult to recover. Investors may be reluctant to do business with the company, and the stock may never regain its former value. This can ripple throughout the stock market, causing a crash.

Central Bank Policies

Central banks, such as the Federal Reserve in the United States, play a significant role in regulating the economy and setting monetary policy. When they make changes to interest rates or the money supply, it can have a ripple effect throughout financial markets. Central banks also use monetary policy to try to achieve specific economic goals, such as low inflation or high employment. Adjusting interest rates and the money supply can influence the amount of money available in the economy and the level of spending by consumers and businesses.

Changes in monetary policy can also have a significant impact on financial markets. For example, when the Federal Reserve raises interest rates, that can lead to a rise in bond prices and a fall in stock prices. This is because investors will shift their money from stocks to bonds, which offer a higher return. Additionally, central banks play a role in preventing financial crises. For example, the Federal Reserve acted as a lender of last resort during the financial crisis of 2008, providing liquidity to the banking system and preventing a collapse of the financial system.

Stock market crashes are terrifying for those who have assets in stocks. By being aware of these potential causes of stock market crashes, investors can take steps to protect their portfolios from major downturns.