Stock market is a volatile place, It never moves in a straight line, some days its goes up and other day it goes down.
What cause these movements?
I must say more than rationality its people’s greed and fear cause the massive volatility , daily fluctuations.
How a man emotions varies from time to time based on his circumstances Likewise, the stock market indices have their upswing moments and downward trend too.
A stock market crash is an event that everyone tries to anticipates or times it; but it is almost impossible to predict every time the market crashes accurately.
A stock market crash is a phenomenon causes an unexpected decline in stock prices and eventually resulting in loss of investors’ wealth. Many investors sell their stock holdings in loss due to panic selling.
Causes of Major stock market crash:
Major stock market crashes are often accompanied with economic recession, speculation, currency value depreciation, high inflation and high unemployment.
A market crash can occur due to a variety of reasons which may include:
- Speculation
- Panic
- Inflation & interest rate
- Excessive leverage.
Speculation consists of Aggressive trading, related to a specific asset class, Trades in high-risk shares.
Panics due to war, country economic instability, political issues.
Inflation & Interest rate includes low corporate profit, low borrowing power, stock volatility.
Excessive leverage includes continuous selling (recent selling of FII), Investors are forced to sell more.
Whatever the reasons could be , market crashes leaves an impact on the financial of an individual and government alike.
Read more about: Why you need to prioritize emergency funds over investing?
1865 Crash:
1865 crash occurred before the establishment of the Bombay stock exchange (BSE).
Cotton was the primary export product for Indian firms at that time. Abraham Lincoln’s campaign against slavery had triggered the American civil war in 1961. This incident choked the supply source of the British.
The cloth mills of Birmingham and other places turned to India, buying up all they could and more. The average exports before the civil war were 528,000 bales – they expanded to over 1.2 million bales by 1865.
1 bales = 165 Kg (approx.)
This was a period of prosperity for those who engaged in the cotton trade. Even cotton was called “ white gold” and its demand grew day by day.
So large traders grabbed anything they could lay their hands on, even tearing apart mattresses and pillows, so they could sell the stuffed cotton.
The money made from selling the cotton to English was deployed in the stock market. The market rise was also contributed by investors who took loans from banks to invest.
Investors were so certain that the cotton boom would continue, bankers were sure money loaned at a high-interest rate would be safe.
The meltdown happened in 1865 due to the end of the American civil war. It caused cotton prices to fall, exports collapsed, and resume of cotton supplies from the United States.
The shares of the bank of Bombay sold at Rs 2850 were down at Rs 87. The Bank bay reclamation shares fell from Rs 50000 to under Rs 2000 – a fall over 96 percent.
This disaster affect Bombay not just economically – Its population was displaced by 21 percent.
Speculation led to the migration of laborers from all parts of India who were attracted to high prices of labor were moved out of Bombay once the bubble burst.
1992 scam:
1992 scam stock market crash is the biggest money market scam ever happened in India, amounting approximately to 24,000 crores (adjusted to inflation). The main perpetrator behind the scam is stocker broker Harshad Mehta.
He was responsible for siphoning 1000 crores from banking systems to buy stocks from the Bombay stock exchange. He was known as Big bull & all the retail investors followed in his footsteps because of his Midas touch.
Within a year, he managed to manipulate the Sensex by almost 275 percent and the market rose from 1000 points to 4000 points.
An article by a journalist caused panic among the investors. Also when the state bank of India found the deficit in government securities his scam came into the picture.
The investigation done on Harshad Mehta managed to manipulate 3500 crores approx. in the financial system.
In August 1992, the stock market fell down by 72 percent after the scam was exposed which led to one of the massive stock market crash in India.
It took almost 2 years for the market to recover after 1992 scam.
2004 – Winning of UPA :
In May 2004 the Bombay stock exchange crashed about 842 points which was the biggest single-day stock market crash in Indian stock market.
The shocking defeat of NDA and meltdown of market in emerging sectors led to the stock market crash.
Indian investors started to dump their shares on fear of the country’s new government would halt the growth of the economy.
By looking back at the history ,nothing such happened . India has delivered an 8 percent rate GDP growth.
2008 Financial crisis:
“Housing market in the US – Too big to fail”
This is the thought of bankers, investors, real estate firms, public about housing market.
Banks love to give out mortgages because housing market is secure, and the value of houses increase even if the borrower failed to pay the mortgages & default.
At worst case, Banks can auction the house.
Overall it seems to safe bet. But the problem is banks have a limited amount of capital & can’t give out additional mortgages.
So banks came up with a plan to get more money to give out more mortgages. They bundled individual mortgages as large groups and sold them as bonds to investors.
The banks & investors would take the interest paid on mortgages as profit.
Everyone was making money! But the investors become greedy and pour more money. So now banks must give mortgages to individuals. So banks can give back bonds to investors. Banks started to give mortgages to people who were clearly with low credit.
Over time, people couldn’t pay their mortgage & started to default. But the owner of the house is not the individual who pays the mortgage but the banks/investors. Because Banks/investors are the ones who bought the house since they gave people their own money to buy it.
So when the mortgages were defaulted by masses, banks were not getting the house. The investors were. Too many houses were put on sale at once, but no buyers.
The housing market burst along with Lehman’s brother’s downfall crushed the entire world’s financial system.
It resulted in a crippling effect and the stock market across various major countries were crashed and finally global economy went into a recession.
2020 Pandemic crash:
World health organization classified Coronavirus as a potential pandemic in February which caused Nifty & Sensex to fall sharply.
As the pandemic further spread and the number of cases in India rise , stock market crash another 13 percent.
A nationwide lockdown was announced by Prime minister Narendra Modi starting from March 24th at Midnight.
Lockdown was required to curb the spread of the virus, but it affected the Indian economy severely.
Due to lockdown, many people lost their job. The tourism industry, retail industry, manufacturing sector were affected majorly.
Many Mitigation efforts were taken by the government for the economic recovery and it took several months to stabilize.
Conclusion:
The underlying factor of the Market crash was caused by people’s panic and greed combined with irrational decisions.
Controlling our emotions during the crash need temperament. I believe history offers us so much of lessons to learn from it.
Well the history always repeats!
Stock market crash can be a blessing in disguise for you , when your behavior and emotions are balanced together !
Thank you for reading!
