The global pandemic has left the world in shambles. Even though their work on creating vaccines has been expedited, the future of the virus, as well as how it will continue to affect the world, is still uncertain.
In the UK, a new variant of the coronavirus has been discovered, which has further created chaos in the financial and economical sector. The coronavirus pandemic has had a significant impact on businesses, therefore, its unpredictable nature can only cause further stress.
Investors of the stock market are now concerned about the implications of the new breed of the virus. Essentially, new investors who lack experience in the market may struggle with the volatility of the stock market, especially if a stock market crash is expected in 2021.
If you are wondering what is a stock market crash, this guide has provided a brief summary of what a stock market crash is, along with its impacts.
A crash in the stock market is experienced when the market index falls significantly in one day, or a few days, of trading.
However, there is a difference between a stock market crash and a stock market correction. The stock market correction is referred to as the case when the market experiences a drop by ten percent from its fifty-two weeks high, over days, weeks or months.
Within the last forty years, almost every bull market has experienced a period of correction. As this is a common part of the market, most experienced investors embrace it openly, as they can use it to their advantage.
Stock market crashes can occur due to several reasons. However, the primary cause of the crash is when the sellers are afraid of the unanticipated future. Often, an unexpected economic event, global catastrophe, or an economic crisis can lead the stock market to crash.
Traditionally, stock market crashes typically occur towards the end of the extended bull market. At this point, the naive optimism tends to drive the stock prices to high levels, which cannot be sustained. As a result, the prices of the companies exceed their original worth, when measured by the earnings.
Additionally, several of the recent stock market crashes can be attributed to a freshly curated technical development, known as quantitative trading. This technique employs quant analysts to devise algorithms in digital programs to trade stocks. This form of program trading has experienced extreme growth, which has impacted the stock market significantly. As the individual investors, along with their desire to earn more, has been replaced by carefully designed algorithms, the panicked outcome has introduced crashes.
With that said, the stock market crash in 2020 was not caused by the use of quantitative trading, rather it was due to unanticipated circumstances. If you are wondering what caused the stock market crash of 2020, continue reading.
It can be clearly stated that the stock market crash in 2020 was a direct impact of the coronavirus (COVID-19) pandemic. The virus laid a significant emphasis on the world’s economy, which essentially caused fear in the sellers.
Now, the investors may feel slightly confident about the future of the economy, however, there are still some threats present which makes them question, “Will the stock market crash again?”
While one of the major threats is still the new variant of the COVID-19 virus, other risks, such as Brexit, can create fear for investors due to unexpected circumstances.
Additionally, at the moment, consumer confidence is quite fragile and the absence of investments from struggling businesses has contributed greatly to the drop in the economy. This suggests that economic growth may be unsatisfactory in the upcoming term.
It is probable that another stock market crash is coming in 2021, as the track record of the stock market demonstrates a lack of perpetual growth. However, as global economic growth is expected to increase by five per cent, the stock market may avoid the crash.
With that said, it can be predicted that an event is probable that can cause the investors’ confidence to reduce, as a response to the difficulties faced by businesses to continue with their operations. As a result, it is extremely important to prepare yourself for the potential crash of the stock market, so you can take advantage of it.
What are the impacts of stock market crashes?
Stock market crashes can have severe impacts. In most cases, a stock market crash can result in a bear market. A bear market refers to when a market falls ten percent beyond a correction, where the securities prices reduce by twenty per cent or more from recent highs, during a prevalent pessimism and negative investor attitudes. Often, bear markets coincide with an economic downturn, which may include a recession. Additionally, a crash of the stock market can also result in a recession.
As stocks are considered a crucial generator of income, which is used by corporations to manage and expand their operations, a crash or a decline in the prices can lead to severe problems. Essentially, corporations have a limited ability to experience growth. Moreover, several firms, which are unable to continue their operations, tend to employ the layover approach to try and stay afloat.
As the rate of unemployment increases, the rate of spending decreases. Hence, a drop in the market demand is observed. This drop refuels the cycle and more layovers have ensued. When the decline in the demand is observed, the economy continues to shrivel. This creates a recession. Historically, stock market crashes have led to several adverse circumstances, such as the Great Depression.
However, preparing for a crash can help investors prevent losses. If you are concerned about a potential stock market crash, the following guide provides a few techniques that can be implemented.
Although it can not yet be confirmed if the stock market will encounter another crash in 2021, it is essential to be prepared either way. You can follow the aforementioned tips to avoid any mistakes that can lead to losses!