What Is a Stock Market Crash?

A Stock Market Crash is a drastic and rapid plunge of stock prices affecting a sizable cross-section of the stock market. The results are usually an atmosphere of combined panic, gloom, and even despair, depending on the extent of overall losses to investors–from individuals to large corporations and organizations. Uncertain or weakened economic factors are most often the major general cause of these dramatic stock market downfalls. Also, many times they are preceded by periods of market speculation and optimistic trading patterns. Evaluation of the months leading up to a market crash often reveal a definite increase in stock prices, as well as heavy use by investors of both margin debt and leverage.

While long-term bearish markets often make traders and investors uneasy about the possibility of a market crash, such a severe market downturn is not necessarily the result of a bear market. In fact, market crashes are characteristically different from persistent bearish trading trends due to the feverish panic selling and plummeting prices over a few days. Bear markets, though also marked by decreasing stock prices, often take place over a time period of months or even years.

The infamous Wall Street Crash of 1929 was preceded by the prosperity and extravagance of the Roaring Twenties. During this colorful decade, modern technology created such remarkable items and conveniences as radios, airplanes, automobiles, telephones and the electric power grid. Stock prices of highly successful corporations like RCA and GM rocketed to amazing heights. Wall Street investment leaders such as Goldman Sachs realized new record-setting profits. Between August 1921 and September 1929, the market rose from 63.9 to 381.2. Yet, during the summer of 1929, prices began to experience notable declines. Then on October 29 (Black Tuesday), the Dow Jones Industrial Average dropped by 38 points to 260, creating total chaos. Within just two days, the Dow Jones Average had taken a 23% downturn. Subsequently, it continued its downward course to finally reach rock-bottom in July 1932, having lost 89% of its value from earlier years of prosperity. This horrendous market crash preceded the Great Depression, the most severe economic crisis of the era.

On the devastating Black Monday of October 19, 1987, the stock market took a downward plunge of 28.3%. Twenty-one years later, during the week of October 6 in 2008, the market showed pronounced low closing levels for five days. The Dow Jones Industrial Average dropped more than 1,874 points–a devastating 18%. In addition, the S&P 500 plunged over 20%. Then on October 24, many worldwide stock exchanges reported their largest declines ever, with downfalls, on an average, of about 10%. In the US, the Dow Jones Average took only a 3.6% fall, since both the US and Japanese markets gained against other world currencies and exchanges amidst international safe haven trading. In the opinion of numerous financial industry experts, this was most likely the largest and worst such international financial crisis in history.

If the US and other world economies should suffer the misfortune of another Stock Market Crash any time in the near future, there are several definite precautions, as well as actions, that even small investors can take to stay afloat during the crunch and resulting storm:

• Leave shorting to pro traders and investors. For the majority of traders today, selling short is just too difficult, and confusing. Snap-back, or quick reverse rallies in trading can virtually cancel out all your profits.

• Watch market movements and keep up with fundamentals. Even during abnormal trading conditions or a crisis, never ignore financial charts and data showing market movements, whether they are slight, large or erratic. There are always market signs and signals available to careful, knowledgeable traders and investors.

• Buy on the dip, with caution. Instead of selling short during a market crisis, wait until you can buy on the dip. Just be sure to set lots of stops in case you make a wrong decision.

• Stay on the sidelines. Another safer strategy is to remain on the sidelines and watch for less risky trading opportunities. It’s best to refrain from trying to excel as a trader during times of high market volatility and uncertainty.

• Be flexible and nimble. Whenever the market is volatile and investors become extremely emotional, good traders stay both nimble and flexible–ready to shift trading gears, styles and directions according to the immediate market climate.

• Always be prepared to cut losses quickly. In a rapidly changing market, stop loss orders don’t necessarily provide the protection they’re meant to. And always have a few calculated mental stops and limits ready to handle unexpected changes in trading trends and volatility.

Although a Stock Market Crash can be devastating to many investors, market sectors and the overall economy, with some careful planning, keen market observation and skillful trading, you can still stay afloat in today’s unpredictable market, and even make profits, whether large or small.