A stock market crash is a sudden decrease in the prices of the stocks in the market, which may happen due to many factors. These factors could be some sudden economic event, some major political shifting, or a catastrophe which can cause panic among the sellers. To put it in a few words, the stock prices start falling, and the panic causes herd selling to cause the market to crash over a few hours or within a few days. Panic selling of the stocks worsens and induces the price drops, and there is no going back. The current situation of the market crash is caused by the coronavirus pandemic and has affected all the businesses globally.
Stock market crashes are a nightmare for the stock traders as they have to close the positions before the market closes. The reduction in prices puts them in a panic situation and they want to stop making a further loss on their holdings. All the traders think similarly and start reacting in this way causing bulk selling. Stocks are very important for all the businesses as they obtain cash from them and manage their workforce and stakeholders through it. When the prices of the shares fall, the businesses can not earn cash and have to reduce the workforce, which in turn reduces the production and demand. This process recurs with all the businesses and brings the whole economy down, causing the recession.
The flip side of the stock market crash is that it provides the opportunity for the long term investors to invest in the businesses that otherwise had huge prices. It would be a risk entering the market during these times, but there is a rich history of people who had the courage and took the risk of buying the shares during a crash. The stock market always eventually comes back to normal, and the prices recover in the long run if not in the short run. And the investors who took the chance during the crash have been rewarded prosperously.
One thing that the traders should avoid doing during the crash is selling off their investments for lowest prices, which is totally uncalled for. The market usually recovers in some time and the trader should have the patience to hold on to their positions and sell at a later time, to cover at least the initial price if not at profit. During the crash, it is important to balance your portfolio, and just watch over the prices to act in a logical manner. It is also important to diversify the portfolio and not invest in same sector stocks. Also the trader should look at the long term prospects and decide logically over the growth of the invested businesses.
Hence, the bottom line is, stock market crash is the test for the trader where he has to think logically and decide the trading decisions in a fair manner with some patience and perseverance. Almost everything falls into place eventually, whether it is the stock market or life.