Finance

Causes, consequences and how to prevent them

Share prices have fluctuated for as long as there have been stock exchanges. But sometimes a crash is so drastic that it is called a crash. Why does something like this happen – and how can investors prepare?

Black Friday, financial or corona crisis – panic reigns in a crash. In the worst case, this will trigger a downward spiral. Dramatic price crashes often lead straight into the economic crisis, not only for countries but also for investors. The latter could actually know better.

We’ll show you how to best prepare for a stock market crash, what to do when you’re stuck in the middle – and what exactly is meant by that.

What is a stock market crash?

Under a Stock market crash – in German too Stock market crash – one understands an extreme Price slump on the stock exchangewhich can take a few days, but also several weeks. Are typical at this time panicked salesthat are compounding the drop in prices. This distinguishes a stock market crash from the so-called bear market, in which prices also fall, but less quickly and suddenly than in a crash.

Above all, a stock market crash can after unexpected negative events occur – such as the bankruptcy of the investment bank Lehman Brothers in 2008 or the outbreak of the corona pandemic in 2020. It is also possible that the end of a Speculative bubble triggers a crash. This is what economists call a situation in which, for example, high sales are made with stocks or real estate, but also with raw materials – but at ultimately exaggerated prices.

Prices then no longer rise because of the value of goods or assets, but because of the expectations investors have of them. A prominent example of such a bubble is the Tulip mania Early 17th century. It is considered to be the first speculative bubble in economic history to trigger a stock market crash.

Tulips as an object of speculation

Back then, wealthy Dutch people were crazy about the newly emerging flowers; they were seen as objects for lovers who had to own whoever was self-respecting. Others sensed the big money and invested in tulip bulbs in order to later sell the flowers for a profit. But the idea got around, the price of onions rose rapidly – until it was finally so high that it dawned on people that tulips couldn’t be that valuable.

So they stopped buying them at these overpriced prices. And the sellers ended up selling the flowers for a lot less money than they had paid for the bulbs themselves. The bubble burst.

What are the consequences of a stock market crash?

After a stock market crash, the so-called real economy often rushes into the basement, i.e. the actual economic output of a country as measured by its gross domestic product. This often follows first Recession. By definition, this means a downturn in the economy for two quarters in a row.

This sooner or later leads to a low, too Economic downturn called. If this low persists over a long period of time, one speaks of one depression.

The downward spiral usually runs like this these days: Because investors in panic advised, they sell stocks en masse for fear of greater losses, causing stock prices to fall. As a result, bank stocks are worth less. For fear of financial bottlenecks, they therefore start hoarding money.

Your fear: It is possible that worried savers will get the idea to empty their accounts. And since bank balances are not real money, only Promise to pay out money it can happen that the banks do not have enough cash in stock if too many people want to withdraw money at once in such a “bank run”.

So, as a precaution, the banks are skimpy on loans. However, this means that companies can invest less, have to lay off employees or even go bankrupt. Even private individuals now prefer to keep their money together. The crisis is perfect.

Can you reliably predict a crash?

No. Even if the various “crash prophets” want to make you believe. Nobody can predict with certainty when the next crash will occur. The only thing that is certain is that it will come. Forecasts that claim otherwise are nothing more than scams to sell certain financial products.

If, on the other hand, you knew reliably the time of the next price fall, you as an investor could invest in the stock market without any risk. But since it doesn’t work that way, you should make sure that you reduce your risk. More on this in the next section.

How do you make a depot crisis-proof?

Basically, there is no depot that a crash – at least for a short time – cannot damage. But the good news is: The losses are initially only virtual. It is only when you sell your securities at too low prices that you have really lost money. And you are more likely to sell if you have taken more risks with your portfolio than you can take.

As an investor, you are therefore well advised to Your portfolio – that is, the entirety of your assets – put together so that they don’t put everything on one card. It is better to spread the risk broadly – across different asset classes such as stocks, overnight money or real estate as well as companies, industries and countries. As a rule, not all types of investment are equally affected by a crash. Even in a crisis there are winners.

One of the best ways to diversify risk is with one Savings plan on an index fund, short ETF (“Exchange Traded Fund”). ETFs are special funds in which a computer algorithm tracks an index such as the worldwide MSCI World. Anyone who has been invested in this international stock index for 15 years in the past decades has not been able to make a loss on balance.

What should investors do in the crisis?

First of all: keep Calm. When you have a long-term strategy and have diversified your risk, you can sit back and relax. They knew, after all, that crises would come. Well you have to just sit out.

If you invest your money with an ETF savings plan, for example, you can even look forward to: Because you automatically receive more shares for your monthly savings amountbecause the prices have fallen. As soon as the situation recovers, these additional shares will help you to grow your wealth even more.

So the crisis is also one Opportunity for investors. Anyone who has not yet invested in the stock market can get into the crisis cheaply. But be careful: do not start blindly, but first acquire knowledge and come up with a long-term strategy. This is the only way to be sure that you understand what you are buying and that you will not panic about the next crisis.

How did the stock market crash in 1929?

The end of the Roaring Twenties came suddenly – and went down in history as the most famous stock market crash of all time. Of the black friday – Black Thursday in the USA – ushered in the Great Depression at the end of October 1929, also known as Great Depression (in German: great depression) is called.

The crash happened according to the usual pattern: After years of gains the American benchmark index Dow Jones suddenly recorded sharp falls. Investors panicked, trying to get rid of their stocks almost at the same time, fueling the plunge. But what was actually the trigger for the first sudden drop in the Dow Jones?

The explanations vary depending on the business school. What is certain, however, is that many Americans were in the 1920s Consumer goods on credit performed. But not only that: They also invested money in the stock market that they didn’t have. Lured by the rising prices because of their own strong consumption, many people smelled the quick money – and financed their securities through loans at extremely high interest rates. Always in the hope that the bet would pay off. She didn’t.

Those who use money that are not their own panic more quickly. So investors ended up selling stocks for a dollar or two that had been worth a hundred times that a few weeks earlier.

The consequences: loans could no longer be serviced, Banks went bust, Confidence in the financial system was lost, companies produced less and customers consumed less. One Vicious circle, from which the economy only recovered many years later.

How did the financial crisis of 2008 come about?

Several problems came together here. For one, many investors fled in risky investmentsbecause interest rates were low in the early 2000s. On the other hand, Americans in particular took advantage of the low interest rate, to finance the purchase of real estate. The banks even gave loans to people who were actually too low Creditworthiness.

For this they invented so-called “subprime loans”, second rate variable rate loans. As collateral, the borrowers had to deposit securities that were secured by mortgages. But then the US Federal Reserve raised the Base rate on.

As a result, the interest rate on “subprime loans” rose – so high that many Americans could no longer repay the loans. Subsequently they also had to sell the houses again. Real estate prices plummeted and mortgage-backed securities were downgraded, causing them to depreciate.

In September 2008 this burst real estate bubble led to Collapse of the Lehman Brothers investment bank – an unexpected negative event that finally caused the stock markets to collapse. Countries around the world fell into recession, whereupon one Debt crisis which even put the euro at risk.

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