DEFINITION of 'Crash'

A sudden and significant decline in the value of a market. A crash is most often associated with an inflated stock market. Causes for a crash may include an economic bubble in which securities, or other investments, are trading at prices far above their intrinsic value, or a highly-leveraged market in which debt is used to finance further investment. Crashes are distinguishable from a bear market by their rapid decline in a number of days, rather than a decline over a longer period of time. A crash can lead to a depression in the overall economy and subsequent bear market.

BREAKING DOWN 'Crash'

A crash is both an economic phenomenon and a psychological one. Investors who see a rapid decline in the value of a particular stock may sell off other securities as well, leading to the possibility of a vicious spiral marked by negative crowd behavior. In order to reduce the effect of a crash, many stock markets employ circuit breakers designed to halt trading if declines cross certain thresholds.

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RELATED FAQS
  1. How do investors lose money when the stock market crashes?

    Over the last hundred years, there have been several large stock market crashes that have plagued the American financial ... Read Answer >>
  2. What is an echo bubble?

    To understand the term "echo bubble", you have to understand what a bubble is. A financial or economic bubble occurs when ... Read Answer >>
  3. What is Black Monday?

    Monday October 19,1987, is known as Black Monday. On that day, stockbrokers in New York, London, Hong Kong, Berlin, Tokyo ... Read Answer >>
  4. What caused the stock market crash of 1929 that preceded The Great Depression?

    Find out what led to the stock market crash of 1929, which in turn led to the Great Depression. It sparked a nearly 90% loss ... Read Answer >>
  5. What caused Black Monday, the stock market crash of 1987?

    Find out about the factors behind the stock market crash of 1987, also known as Black Monday, when the Dow Jones Industrial ... Read Answer >>
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