One stock market collapsebetter known as “stock market crash”, it doesn’t just have consequences for investors. That is, it can also affect your personal finances even if you are one of those people who have never bought any shares. Thus, it is important to understand what is this phenomenon and what are the implications for your daily life.
What is the stock market crash?
Now, on the stock exchange, shares are traded at a certain price or value. Thus, as with any other asset, variations in quotations may occur: it is the market at work. In other words, there are several situations that can make cause the share price of a particular company to fall and other companies to rise.namely: a conflict; a war; a scandal; or even a pandemic. Now, what happens in a crash is that the price of practically all the stocks listed on the stock exchange suffers a sudden and very rapid drop. That is, there are more investors interested in selling than in buying. And when that happens, the stock market, which lives on supply and demand, collapses.
In fact, when we talk about a stock market collapse, we are immediately reminded of the the New York Stock Exchange crash in 1929 and, consequently, the Great Depression. However, already in 1987, the so-called “Black Monday” had taken place.the day when in a single session, the Dow Jones index (based on the quotation of 30 of the most important companies in the United States) dropped more than 22%.More recently, we had the 2008 financial crisis where although there was no stock market crash, there were financial consequences to the world scale. The unexpected appearance of pandemic and in recent months the War in Ukrainesounded the alarm and the fear of another sudden and accelerated fall in the stock market.
What are its consequences?
When the stock market crashes, the consequences quickly make themselves felt all over the world. That’s what happened to October 24, 1929when about 70 million shares were offered for sale on the Wall Street Stock Exchange without there being any interest in your purchase. In this “black thursday” many investors lost a good part of their investments. The shares they held became “zero”.As a result, many companies and banks lost large amounts of money. There were many bankruptcies! Thus, Unemployment has increased and purchasing power has decreased. In turn, demand also decreased which caused a significant and continuous fall in prices – the so-called deflation. This phenomenon also dragged other sectors into this crisis.
Stock market collapse: Inflation, deflation and stagflation
All these concepts have similarities with each other in terms of their effects. Inflation, deflation and stagflation are three concepts related to prices, but with effects on the financial system similar to those of a “stock market crash”. So, let’s see: Inflation concerns a general rise in prices;Deflation is the opposite movement to inflation. That is, register a price drop during a certain period.Stagflation joins the inflationa economic stagnation it’s the rising unemployment.For example, the fall of 1929 gave way to a banking system crisis. So, and afraid of losing their deposits, many customers started to withdraw their money, which put liquidity problems for banks.It should not be forgotten that the objective of the deposit guarantee fund, to which Portuguese banks are obliged, is precisely secure your customers’ savings up to a certain limit. On the other hand, although with different causes, essentially related to the real estate market, the 2008 financial crisisof which the bankruptcy of the bank “Lehman Brothers” is the greatest symbol, has also resulted in an economic crisis. Then there was a public debt crisis from several countries. In the case of Portugal, it was necessary to resort to a “financial rescue” program with the intervention of the Troika.Also read: Investing in times of inflation: what options to consider?
Stock market collapse and its impact internationally
As already mentioned, a stock market crash doesn’t just affect those who invest. In fact, it affects an entire economy and with worldwide consequences. The greatest example in history was the Stock market crash in 1929 in the USA and which gave rise to the famous “great depression”which was characterized by: a deep financial crisis; poverty; and unemployment. Industrial production fell by around 47% and GDP by 30%. Consequently, the effects of this crisis did not take long to make yourself feel In other countriessuch as: United Kingdom;France;Germany; and in more distant countries such as Japan or Brazil.Now, nowadays, with the economic globalization in which we live, a collapse of a country’s stock market would have an even greater international impact.. For example, a sudden and rapid drop in stocks on the New York Stock Exchange would be enough to install panic among investors in Paris or London, clearly. This is because, companies today have a global reach and investors easily buy shares in companies located in other countries. In this way, what happens in one country quickly reaches other countries, especially when economic and financial relations are significant. It’s called the “snowball” effect..That is, with a supply much higher than demand, many stocks would be without a buyer and these stocks would fall. In this scenario, it is expected that there will be no interest in investing. And the consequences are not just for the purse. Investors are affected by everything that happens in other countries, so a stock market crisis can lead to other crises in the economy, from the real estate market to the financial market.
Bear market vs bull market
These two terms bear and bull mean in Portuguese, bear and bull, respectively. And what does the bag have to do with these two concepts? well, these characterize the state of the economy and the behavior of investors in a given context. This is:bull market – when there is optimism in the marketinvestors are confident and there is a great demand for shares – in this scenario there is a economy growth;Bear market – when there is pessimism in the marketinvestors are apprehensive, demand decreases and consequently the share price drops (more than 20%) – in this context, the economy is going through a crisis.
Is there a possible stock market crash again?
At any moment, the stock market could collapse again, depending on the global economic situation. Recently, with the war in ukraine, the fear of a new crash took hold among investors. Last June, the rise in inflation in the US caused significant declines in the main stock indices. More specifically, on the 13th of June, many investors suffered significant losses from this share price drop. Even with some recovery the following day, the possible rise in interest rates by the US Federal Reserve instilled fear among investors – market in bear mode, that is, apprehensive and unreceptive to investment. That is, when there is a war, inflation and rising interest rates, investors are afraid to buy stocks. In this sense, the stock market follows the fear of a new global crisis. In Davos, at the meeting of the World Economic Forum that brought together political leaders to discuss the main issues facing the global economy today, one of the main points on the agenda was the eventuality of a recession and its consequences. At this summit, important issues were also discussed, such as Russia; the recession and the rates and interest.According to the experts present at this summit, should a new crisis arise, it will not be worse than the previous ones. In other words, a new stock market collapse may not be as serious as what happened almost 100 years ago, but it all depends on the degree of resilience of the economies. Read also: 12 golden rules for investing in the stock market