STOCK MARKET CRASH- 4 Biggest Indian Crashes

Overview

The stock market is a significant platform for money-making, but what if one day it crashes? What happens then? What exactly is meant by the Stock Market Crash?

Introduction

A stock market crash is when stock prices fall very fast in a short period, triggering panic and financial losses. It generally happens when scared investors quickly sell all their stocks, causing the price to drop

A Stock Market crash can be a result of a big tragic event, economic distress, or disintegration of a long-time formed speculative bubble. The retailer’s panic selling can lead to repressing the stock prices further, playing the role of a contributor to the stock market crash. Although there is no definite ground for a stock market crash, it can leave a major impact on the economy.

Although a stock market crash is not the same as a market correction. A correction is when a stock price declines for a short period, generally around 10%, and the market recovers quickly. But a crash is a much bigger and faster drop, usually more than 20%, and the market takes a long time to get back to normal. 

It is valuable for investors to study past stock market crashes because it helps them understand how markets act during tough times. By studying past crashes, investors can find common patterns, learn why they happened, and avoid repeating the same mistakes. This helps them manage risk effectively, invest better, and remain calm during an unstable market. 

Why Stock Market Crash?

“Investors have to be careful when everyone is buying eagerly, and seek opportunities to buy when others are confused and selling.”—Warren Buffett

When you look at it, there are a bunch of reasons which can influence a stock market crash, such as:-

Panic selling

The most common and major contributor to a crash. Investors, when fear that their investments are at risk of falling down, lead them to sell their shares in order to protect themselves from monetary loss; as prices of the stock begin to drop, fear spreads like wildfire ensuring more Panic selling.

One troubled step from the big institution of the market can induce panic selling in investors and can create huge no. In panic selling.

Natural or man-induced calamity

Anything which can cause harm and affect the country’s economy like a pandemic, war, or flood will cause a problem for the stock market and may lead to a crash also. For example, the recent pandemic-induced crash of Covid-19 in March 2020.

Economic Crisis

An economic crisis arises when a country faces a major downgrade in the economy due to its financial issues which leads to lower economic production(GDP), less availability of money, and frequent changes in prices which might go up and down because of inflation and deflation. An investor reacts quickly to any slight change in the market and in fear, tends to pull out the stocks at a slight inconvenience.

Speculation

While investing in any sector, investors will always hope for a rise in the value of their security in the future, a speculation that gives rise to a bubble of investors’ thoughts. Later when that speculation doesn’t meet with the result of reality, it bursts out loud leading to mass-sell off of the securities.

Also Read: Private and Public Sector Banks

Can Market Crashes be Predicted?

It is very difficult to predict market crashes. While experts study the market, no one can tell when it will crash. However, they identify warning signs that signify that the market is at risk. These indications include:

• Economic Downturn

An economic downturn occurs when the economy starts slowing down. There are different factors, such as job losses, high interest rates, high inflation, and slow economic growth, which lower investors’ confidence. Thus, stock prices of companies reduce and increase the chances of a crash or market decline. 

• Global or Political Events

Unpredictable events such as financial downturns, wars, policy changes, and pandemics can have a significant impact on the stock market. This uncertainty makes people scared, and they sell their stocks. Thus, such events can cause sudden market crashes.

• Overvalued Markets

When stock prices exceed their intrinsic value or the company’s earnings, it is called an overvalued market. This usually happens because investors become too excited or start taking risky bets. When prices are not supported by real value, the market becomes unstable and can suddenly crash.

• High-risk Speculation

When people purchase stocks just because the price goes higher, not because of the company’s fundamentals, high speculation occurs. This leads to a sharp decline in the stock price.

You can’t forecast, but you can be ready.”—Howard Marks

What is the Anatomy of a Stock Market Crash?

The anatomy of a stock market crash is the process or stages through which a financial market moves before, during, and after a sharp drop in stock price. Understanding these stages helps investors to spot early warning signals and make informed decisions. 

• Overvaluation

At this point, stock prices exceed their actual value, and traders ignore the company’s fundamentals. Also, they continue to purchase stocks driven by market hype and optimism, which makes the market unstable and increases the chances of a crash. 

• Panic Selling

Once investors feel fear, they start selling their stocks quickly to avoid losses. Due to a sudden increase in selling decline the stock price.  This phase raises the market volatility and market crashes. 

• Trigger Event

Sometimes, negative news or events can trigger you. This could be a policy change, a worldwide event, or financial fraud that makes investors anxious. Because of this, investors can quickly sell their stocks, which leads to a decline in the market price. 

• Recovery Phase

The recovery phase starts when the panic reduces and the market stabilizes. At this stage, the extreme price swings reduce, and investors slowly become confident. This led to slowly increase in stock price over time. 

• Market Boom

A crash happens when the market has been doing well for a long time. During this time, investor confidence increases, stock prices surge, and lots of people start investing to take advantage of the rising market.

• Market Collapse

The market collapses when more people sell, and the price of the stocks declines sharply. At this time, the price fluctuates widely, and a lot of buying and selling happens. 

Key Insight: Market crashes can create buying opportunities for long-term investors.

What are the Causes of Stock Market Crashes?

The causes of stock market crashes include financial, psychological, and economic factors. When these factors confuse or scare investors, the stock price falls sharply. 

• Overvaluation of Stocks

When a stock price far exceeds the company’s earnings or intrinsic value, the market becomes overvalued. These prices cannot remain high for a long time. Eventually, prices decline, and a crash begins. 

• Panic Selling

When investors get scared, they start selling their stocks quickly to avoid losses. This unexpected surge in selling pressure can drop the price rapidly and increase the chances of a market crash

• Speculative Bubbles

When traders purchase stocks simply because prices are rising, not because of the company’s fundamentals, a bubble forms. This increases the prices above their real value, but once the bubble bursts, the stock prices suddenly drop.  

• Financial Misconduct or Regulatory Shifts 

Sudden corporate frauds, shifts in government policy, and banking instability can lower the investors’ trust in the market. Because of this, they start withdrawing their money, which leads to a decline in stock prices. 

• Global Events and Crises

Unforeseen circumstances such as significant political changes, financial instability, wars, and pandemics can destabilize the economy and trigger sharp market downturns. This makes investors anxious and impacts their decisions, which leads to a decline in stock prices.

• Economic Crisis

Unstable economic circumstances can impact the stock market. For instance, high interest rates, recession, rising inflation, and unemployment can create unpredictability. This lowers investor confidence and affects market stability, which ultimately decreases stock prices.

What are Some Major Global Stock Market Crashes?

Over the years, the Indian stock market has experienced numerous significant crashes due to scams, world affairs, and economic downturns. These crashes not just impacted investors but also the overall financial market.

1992- Harshad Mehta Scam

1992 Indian stock market scam, disrupted the whole Indian stock market causing investors to lose approximately 5000 crores.

Mehta used market vulnerabilities and exploited loopholes which lead to inflation in stock prices by as much as 40 times their original value. Traders who benefited from this scam falsified information to get loans from the bank, which later came to light on 23 April 1992, because of the journalist Sucheta Dalal. 

As she wrote a column in the Times Of India stating that Harshad Mehta used forged Bank Receipts to get unsecured loans and used various other small banks to issue Bank receipts on demand, once these receipts were issued, they were passed on to different banks and in return, banks gave money to Harshad Mehta under the impression of lending money against the government securities.

That money was used to raise the prices of the stocks in the market. Later the share was sold to the relevant party for a good amount of benefit and the due amount of money to the bank was returned. It went on for a good period of time without coming to the notice of anyone. When later on fraud got exposed it resulted in a market crash and left the banks with worthless debt in the millions.

Crash of 2008- Black Monday

The Global Financial Crisis had a major impact on the stock markets worldwide, including India. In 2008 stock market witnessed several sharp drops in the BSE Sensex index. 

A dramatic drop of 1,408 (8%) to 17,605 was seen on January 21 leading to a great loss of investors’ wealth, encouraging a temporary stop due to technical issues.

This phenomenon was named Black Monday as it featured numerous factors like global economic uncertainties, the horror of the U.S. recession, the reallocation of foreign funds from an emerging to a stable market, a decline in the interest rate, and a fragile market.

The trouble continued as Sensex dropped further on January 22 by 875 points (5%) and it continued till November. The last recorded drop was in October with a fall of 1070 points and landing on 8701. Overall, the stock market witnessed a wave of severe drops in prices, eating up investors’ confidence and creating chaos in the economy.

Crash of 2016- Demonetization

The Indian stock market experienced continuous  decline in 2016 whereby February 16, BSE has already fallen by 26% in the time span of 11 months, seeing a loss of 1607 points in only 4 days. Indian Bank’s non-performing assets, global weaknesses, and numerous global factors like recession were stated as reasons for this fall. Foreign Institutional Investors(FIIs) sold securities worth crores (Rs 17,318) in consideration of China’s growth and dropping crude oil prices. 

Furthermore, the stock market crashed by 1689 points on November 9, 2016, which was later said to be induced by the Indian government’s crackdown on black money, which created chaos and led to panic selling.

In the time span of demonetization ordered by PM MODI, Sensex dropped 6% to 26,902 and the Nifty fell by 541 points to 8002, leading to the weakening of the rupee. All the other Asian markets were experiencing the same fate as the Indian stock market like S and P index had declined by 4.45%.

Crash of 2020- Covid Pandemic

The COVID-19 outbreak collapsed stock markets globally. Fears of a global recession, lockdowns, and business shutdowns made investors scared. When the whole India was suffering through the pandemic, the Indian Stock market experienced a wave of depression, and the influence of COVID-19 was evidently visible on February 1 in representation of the FY 2020-21 union budget. The Market got badly shaken up in February when Sensex lost 1448 points and Nifty dropped by 432 points because of the increasing stress caused by the pandemic. The worst weekly fall was witnessed in late February since 2009 when both BSE and NSE experienced declines throughout the week. 

On March 4 and 6, the market continued to get worse over time as it fell by approximately 1000 points each day. The declining wave continued for several days, reaching a maximum on March 23, when Sensex lost 3934.72 points (13.15%) and nifty dropped by 1135 points(12.98%) due to COVID-19 lockdowns and recession fears, as everything was shut down in the country by putting a stoppage on the economy. The lowest level recorded since 2016.

These historical crashes reveal that financial circumstances, world affairs, regulatory measures, and market psychology drive stock markets. Even though market crashes can cause panic for a short time, the stock market generally recovers and continues to grow in the long run. 

Key Insight: Market crashes are usually triggered by a combination of economic and psychological factors.

What is the Impact of Stock Market Crashes?

A stock market crash can have a severe impact on businesses, investors, and the overall economy. When stock prices go down, it causes monetary losses and uncertainty in the market. 

Panic and Fear in the Market

Market crashes generally cause anxiety and worry among investors. Due to this fear, lots of investors sell their stocks. This unexpected surge in selling pressure again reduces the stock prices. Because of this, the market decline becomes more intense.

• Economic Slowdown

A major market crash can impact the whole economy. Higher market fluctuations create uncertainty, which reduces investor confidence. Due to this, investment and spending decrease, which can slow down economic growth.

• Losses for Investors

When the market crashes, the stock price drops quickly, which reduces the value of investors’ portfolios. Also, numerous investors face a decline in their investment for a shorter period. Thus, it can affect their overall financial stability.

• Impact on Businesses

When the stock market crashes, companies struggle to raise money from investors. Also, it reduces their confidence, which can limit business activity. As a consequence, the overall growth of a business slows down. 

• Opportunities for Long-Term Investors

Market crashes can trigger losses, but they can also give good opportunities to buy stocks at lower prices. Some investors buy good stocks at lower prices and make a profit when the market rises again.

What Lessons Can Investors Learn and What Strategies Should They Follow?

Stock market crashes teach investors some crucial lessons. The biggest lessons are to avoid panic selling and focus on long-term investment. Panic selling can cause unwanted financial damage, as investors can sell stock out of fear. On the other hand, thinking long-term helps investors handle market changes, achieve their financial goals, and bounce back from the fall. 

As the markets can be unpredictable, investors have to be prepared for unexpected shifts. They should make some strategies, such as keeping an emergency fund, investing in strong companies, and spreading investments. Investing in multiple types of assets and sectors helps investors reduce risk. Also, keeping an emergency fund and investing in strong companies can help them during market crashes. 

Key Insight: Staying calm during a crash is one of the most crucial investing skills.

How to Prepare for Market Crashes and Respond Wisely?

Understanding how to prepare for market crashes can help investors protect their investments during tough times. There are some actions or measures that investors can take before a crash happens. This includes:

• Building a diversified portfolio
• Holding some cash
• Investing for the long term 

It helps investors reduce risk, avoid selling their investments at a loss, and manage market changes.

In order to respond wisely, investors have to take some action during or after the market crash. This includes avoiding panic selling and looking for buying opportunities. During market crashes, investors need to stay calm and avoid selling stocks out of fear. But they have to buy quality stocks as the market offers a chance to purchase at low prices. 

Key Insight: Understanding the causes of stock market crashes and how to prepare for market crashes can help investors make better financial decisions.

Phases of Recovery

One must ask this question: how long will it take to recover from a stock market crash?

Or would I be able to compensate for my loss? The answer is yes, and it has been time-tested that the market tends to have a habit of fast recovery. Like after the crash of 2008, nifty took approximately 8-10 months in going upward from approximately 2200 to 6000+.

Not only this, the recovery of 2016 was pretty fast, as nifty showed a hike in 5-6 months, From 6800 to 9000. If we discuss the crash of 2020, nifty recovered 4600-5000 Points in just mere 8 months and the rally confirmed to touch the milestone of 20,000 by mid 2023.

Stock Market Crash Can Be Avoided?

You can minimize the effects of the stock market crash on your investment. But how? By Diversifying your investment portfolio and investing in low-risk options, maintaining a strict STOP-LOSS order by following a proper risk management process, and by also keeping an eye on the signs of crash will help you in keeping your investment safe.

Conclusion

As we all know a stock market is a fragile place filled with profits and losses but keeping an eye out on patterns of the market for gains can lead to more profit than loss, because every past stock market downturn seems like a chance for gain, while every upcoming future crash appears to be a potential threat.

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