Why does Stock Market crash ?

Updated: Aug 5, 2020

by Kashish Bhatia

“Sensex down today by 200 points, Nifty below 12,200! Many scholars warn of a market crash ”, we hear these words almost regularly with the only change being in the numbers and their signs. Nevertheless, most of the times we tend to think, “ Why do Stock markets crash?”. Well, honestly, it’s a difficult question. There are myriads of reasons behind it, which pool in together and become extremely fatal for the economy. Well, history plays a crucial role in explaining the primary reasons, which laid the ground for the stock market to dwindle. Some of the causes of a receding stock market along with examples of market crashes from around the globe are given below-

1. WARS AND REVOLUTIONS: A war-like situation or a revolution in any country or else a war between prominent countries of the world, can be one of the major reasons for market crashes. Such wars lead to widespread destruction and tension, which cause instability of the markets. For example post the World War II many countries were physically and economically devastated. Also, the latest example is the cold war between India and China, which could lead to such a situation.

2.INEVITABLE PANDEMIC: Global Pandemics like the Spanish virus, the Covid-19 virus,etc., can lead to haphazard situations, and their prolonged existence may even lead to a market crash. The Spanish Flu, for example, had substantially depressed the economy in the year 1918, even though it didn’t affect the global economy to as much extent as COVID-19 has affected.

3. LOW DEMAND: Consumers are the wheels of the wagon called economy. Their demands lead to the production of goods and services and further promote the MSMEs and large cooperatives to prosper, which finally surges the economy. A low demand may directly drive these businesses to suffer a heavy loss. If the conditions become quite adverse they may lead to a market crash. For example, the Indian automobile industry was dwindling months ago, due to low demand.

4. CRUDE OIL: Crude oil is a major driving force for the whole world. An increase in crude oil prices would lead to inflation which would stunt the growth of businesses around the globe. This would again bring an inevitable crisis. For example, the 2003- 2008, the energy crisis was a major setback for the world’s economy, which also caused the automotive industry crisis in the year 2008 to 2010.

5. POLITICAL FACTORS: Political instability, for example in the cases where the government may lose its power, can cause an economic shutdown. Conversely, if a strong government takes hold of the nation, the economy boosts.

6. ATTACKS AND CALAMITIES: Terrorist attacks can be a major setback for the stock market too. For example, the 9/11 attacks caused unimaginable destruction and lead to loss of lives. The attack on the World Trade Center severely harmed the economy of New York City and adversely influenced the global markets. Natural calamities can also, severely affect economic development and further result in a crisis.

It can be concluded that there have been numerous market crises in history, like the United States housing bubble from the year 2003 to 2011, the financial crisis from the year

2007 to 2009, and many more. However, every time, we have taken erudite lessons from the past and revived with even more strength. So it can be concluded that a market crash is a temporary evil, which may have a prolonged existence but will not survive forever.

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