So financial markets have crashed this week and are still very volatile. Here are the most important things you need to know about the market crash.
Market Crash Definition: A market crash happens when indexes ( S&P 500, Dow Jones ) and individual securities ( Stocks, Crypto) prices in the financial markets have a double-digit drop in prices.
Main Reasons for 2022 Market Crash:
- Recent Bank Interest rate hikes which are primarily driven by inflation.
- Supply chain / Import-export issues are continuing to happen after being triggered by COVID-19 and the Europe energy crisis with Russia / Ukraine war.
- Quantitative tightening: Government selling the assets acquired in the past – during COVID!
- Investors’ sentiment that economic recession is in progress and panic selling of securities ( Stock, Crypto etc ).
How often do market crashes happen? Recent examples of market crashes are below: 2020 Covid Crash 2010 Flash Crash 2008 Global Financial Crisis & Housing Market Crash 2000 Dotcom bubble Crash1987 Black Monday Crash 1929 Crash & Great Depression Full list here
Are we in the bear market?
How long will the bear market last?
Bear markets usually last from months to years. The fact is that most bear markets have shorter life spans than bull markets!
Financial Market Crash Vs Recession?
A financial market crash doesn’t mean there will be a recession but most recessions cause financial market crashes – the 2008 Global Financial crisis for example!
What are the different phases investors/traders go through as part of a Market Crash?
Phase 1: Hyper optimism & Peak!
Phase 2: Correction of prices!
Phase 3: Market Crash
Phase 4: Speculation & Temporary Bounce back of prices!
Phase 5: Continuous Decline & Rock bottom!
Phase 6: Optimism / Bullishness
What happens when the financial market crashes & economic recession happens over a longer time?
- Investors lose money.
- Investors lose confidence.
- Companies/ Businesses struggle to raise money so they lay off employees which leads to less economic output and causes an economic downturn and negative investor sentiment.
What are the most important things you should do as a trader/ investor during a Market Crash?
Consider using a 3(R) strategy to deal with the market crash.
(R)eflect: Reflect on your strategies and goals by going through yourtrading plan.
(R)eview: Review your portfolio/investments/trades and research for market opportunities.
(R)ecalibrate: Act on your reflection, review and research to either buy, sell or hold. Don’t be a sheep!
The best thing you can do during market crashes is to have a healthy cash balance!
PS: What goes up, must come down and What goes down may come up!
Next Read: How does the economy work?