A stock market crack is a vertiginous fall of a listed security or a set of them, very often caused by panic or financial alarm.
Cracks are often considered to be the prelude to a period of economic recession , in response to the possible explosion of an economic bubble . However, this is not absolutely essential. In many occasions the effects of a stock market crack do not extend over time and gradually return to the previous situation of normality, which remains a simple passing phenomenon. These fluctuations are due to stock market cycles , which are in turn caused by economic cycles .
There is no defined point at which this drop is set to be considered a stock market crack. Even so, it is usually marked in a fall or collapse of value of about 20%. Which is a fifth of the total value within a short period of time. Some of the stock market cracks featured in recent economic history are the crack of 1929 (event that gave its name to this concept), the technological bubble of the dot-com and the last, that of the subprime and the fall of Lehman Brothers in 2008 .
Phases of a stock market crack
The phases of a stock market crack can be summarized in two:
- A start frequently because of a speculative bubble. This causes investors to start acquiring shares with the expectation that their value increases. The increase in value that occurs invites the rest to invest in the same products. The state of euphoria spreads and the result is actions above its real value.
- At this point the initial investors get rid of the shares at this high price, making this fall and the rest of the individuals want to get rid of their investments too in the face of the collapse caused. This causes a chain effect that creates a generalized state of panic in the stock market in a short period of time.
In the financial markets many speculative movements take place. Thus, in some of them, not in all, it happens that a large number of investors are dragged by current trends or trends, acting in a kind of tide. In these types of situations, those with less information are generally the most affected and those with the greatest volume of losses in the case of stock marketcrashes .
That is why it is usually recommended in times of overvaluation of maximum attention actions, since it is usual that they precede stock cracks and may become good occasions to not act as the euphoric majority and find other investment opportunities.