How Does A Stock Market Crash Occur

How does a stock market crash occur can be answered fairly simply. It's down to a lack of confidence in the marketplace and this can be due to any number of factors. We need to look at those factors to discover the answer to "how does a stock market crash?"

If confidence in the market is lacking it is important to consider both why and how. Does a stock market crash just on the say so of a couple of people? Very rarely, but if those people are major investors who suddenly come out with adverse comments in the media then they could spark a crash.

Those comments may be a result of poor economic forecasts or lower than expected results for a particular sector. It really doesn't matter so much what causes the initial selling its how the more significant investors react that drives the market. Once ordinary investors see the major players leaving the stocks and shares of bigger companies they tend to get drawn into the "herd instinct". That means that even though they don't know for sure that something is wrong they believe that others know something they don't and begin to react without thinking for themselves.

For example if the institutional investors feel one sector of the market is over priced they may decide to take their profits and run. That alone could cause small investors to try to get out at the same time leaving fewer and fewer people who want to hold the stock resulting in panic setting in.

Since the introduction of computers in stock market dealing it's this blind panic reaction that can so easily spark a crash in the market. Because the computers are programmed to react to price falls of a certain percentage they will indicate to the traders that they too should sell. What happens then? Other computers and traders get signals that the market for the shares has fallen and triggers their selling and so the frenzy grows with each set of selling signals feeding the next round of price falls.

The major stock markets are so concerned about this automated selling cycle that they have measures in place to close the markets if prices fall below a certain amount within a particular time frame.

You can see that lack of confidence for either real or imagined reasons can be the answer to the question how does a stock market crash occur?