Why Stock Market Crashes and its reason

[Pushpkumar Sahu]

In this article we will try to understand the reasons of stock market crashes and measures taken by SEBI to tackle the same, but before coming on to our main discussion, let us first understand what actually stock market crash is,

As per technical definition, it is a sudden dramatic decline of stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic selling and underlying economic factors. 

I know you haven’t understood the above definition as it is little bit technical, don’t worry we will deeply analyse the same with demand and supply example;

Stock Market Crash is nothing but a steep downfall of stock indices like Sensex, Nifty 50 and many other small and mid cap indices and its listed shares; gradually due to rapid dumping of shares in the market usually by big investors like FII’s, DII’s which ultimately creates panic among the investors and they also start selling their holdings (shares) with a fear of losing more and more value of investment which ultimately results in excess supply i.e. selling and there are less or few buyers, in simple words it is just a basic concept of economics i.e. demand & Supply, Seller has to sell their holdings at whatever rate buyer is willing to pay which is usually low, thereby taking share price to downward, apart from this there are several other reasons of stock market crashes like high fluctuation in inflation rates, foreign exchange rates, RBI monetary policy, rise or fall in Gold and oil prices etc. It is just an illustrative list there are as many possible reasons of rise and fall of stock market indices.

The example taken of rapid dumping of shares in above explanation is just a trailer, there are so many other reasons of market crash which are discussed below;

1. Economic factors of the country like GDP growth rate, inflation rates, policies of government etc.

2. Global Factors like most of the world stock exchange have an effect due to stock markets of U.S. i.e. Dow jones and Nasdaq, if U.S. market increases then other markets will increase and vice-versa.  

3. Expose of any scam done by any person who is engaged in large volume of trading of shares like Harshad Mehta scam of 1992 and Ketan Parekh scam of 2001 and many more.

4. Expose of fraud done by large cap companies which ultimately results in market crash like Satyam computer fraud.

5. Rise or fall in commodities market especially gold, silver and oil prices.

6.  To overcome market crashes problem, SEBI ( Regulator of securities market in India ) has prescribed certain rules like trading halt, upper and lower circuits, declaration by trader before selling and buying major stake in a company etc to protect the interest of small investors and to stop manipulation of market by big players of the market.

SEBI acts as a watch dog of the Stock market so that big players won’t be able to manipulate the market by bulk buying and selling of shares which ultimately leads to tremendous amount of loss to small investors. Market crash effects the economy in a significant manner as it is one of the most important pillar of economy of any nation, Market crash leads to erosion of billions of dollor of money from the market in a single day, huge amount of capital and investment of investors are whipped out in a moment. Therefore, the steps taken by SEBI to combat the market crashes are the welcoming steps which will lead to fair trading in the market and thus protecting the interest of investors and will surely prove to be a boon for the growth of market and its capitalisation.

Discussions to this article

[KASTURI SETHI]

Dear Pushpkumar Sahu Ji,

Your article is very much information and useful.

What precautions are to be taken so that one should not be a victim of such crashes ?