Stock Market Crash
Candlefocus EditorA stock market crash is typically considered to be a severe form of bear market, which usually results in a prolonged period of depressed stock prices. When stock prices drop, the average market capitalization experiences a significant decrease, and the confidence of investors, who believe the stock is a good investment, is shattered. In turn, panic selling ensues, and the momentum of the sell-off continues, leading to further decreases in stock prices.
In order to prevent stock market crash events, circuit breaker rules have been put in place by securities exchanges. These circuit breakers halt trading if the market drops to certain percentages, most notably the NYSE's circuit breakers, which halt trading in 3 tiers if the market drops by 7%, 13%, and 20%, respectively. Trading curbs, known as "circuit breakers", are also put in place by exchanges like the NYSE, Nasdaq, and CME. These curbs regulate the amount of total shares that an investor can buy and sell in a given period of time, and often dampen the effect of a sudden upswing or crash.
In addition to circuit breakers, exchanges around the world have implemented various forms of market risk mitigation practices, such as barring investor access to capital markets if losses begin to occur and increasing margin requirements to prevent unwarranted speculation.
The stock market is highly volatile by nature, and while these protective measures are in place to prevent crashes, they do not always work. When associated with a major crisis, stock market crashes have the potential to cause significant damage to the economy. Stock market crashes are the worst market scenario and should not be taken lightly. Investors must be aware of the risks and take extra caution when investing.