HOW LIKELY IS ANOTHER STOCK MARKET CRASH TO OCCUR?
Starting in 1929 with the Great Depression, Black Monday in 1987, moving to the Tech Bubble in 2000 and more recently to the Great Recession in 2007, there often seems to be no way of predicting and indeed preventing stock market crashes no matter how many times they happen. Though financial investments represent a dynamic and often volatile industry where trends in the market could be a sign of coming disaster, or could indeed simmer down to nothing more than a mild, overstated panic. So, the question stands: how likely is another stock market crash to occur, and if it is; what are the events that are likely to lead up to it?
AN UPSET IN MARKET PSYCHOLOGY
Investor sentiment has an understated role to play in driving stock prices higher or lower. In reality, the truth that greed, fear and expectations all add to levels of optimism in the overall market psychology, which can lead to overestimations and inflations of stock prices. This, if left unchecked can create a market bubble; an overly rapid inflation of the share price which has the potential to burst and plummet, leaving investors in a panic.
While panic can be said to be a symptom of a stock market crash it is also a large contributing factor. When share prices drop sharply over a short period of time, investors tend to start dumping stock in an attempt to avoid losing further money. This typically leads to a further degradation in the stock’s value at an accelerated rate, resulting in more panic, until eventually the supply of stocks exceeds the current demand for them, resulting in price drops across the entire market.
The stock market, especially where the trade of commodities is concerned, is tightly related to politics and world events. When major events occur, it can have a profound impact on investor confidence, leading them to sell risky stocks in favour of those with more security such as gold or bonds. When this happens without much warning it can lead to a panic, possibly leading to a stock market crash.
LOFTY VALUATIONS OF STOCK
Excessively high valuations of stocks generally precede a stock market crash. Lofty valuations generally result in the price of stocks consistently rising to the point where they inflate too rapidly, essentially having the potential to hit a wall and plummet. When this happens, the resulting panic and change in market psychology as investors try to dump their stocks poses high risks of leading to a stock market crash.
An asset bubble occurs when a share’s price rises far more rapidly than its actual underlying value, which essentially leads to the possibility of a following bust. When this happens, investors generally scramble to sell of stocks, usually even before the bust occurs (and often resulting in it).
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