What is a 'Stock Market Crash'

A stock market crash is a rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, economic crisis or the collapse of a long-term speculative bubble. However, public panic is a major contributor. Hordes of people removing their money from the banks or scrambling to sell their stocks and other assets all at the same time causes economic turmoil and exacerbates any existing economic instability.

BREAKING DOWN 'Stock Market Crash'

Although there is no specific threshold for stock market crashes, they are usually identified as abrupt double-digit percentage drops in a stock index over the course of a few days.

Well-known U.S. stock market crashes include the market crash of 1929, which resulted from economic decline and panic selling and sparked the Great Depression, and Black Monday (1987), which was also largely caused by mass panic. Another major crash occurred in 2008 in the housing and real estate market and resulted in what we now refer to as the Great Recession.

Preventing a Crash

Since the crashes of 1929 and 1987, measures have been put in place to prevent crashes due to panicked stockholders selling their assets in a fire sale. One method is to implement trading curbs, or circuit breakers, which prevent any trade activity whatsoever for a certain period of time following a sharp decline in stock prices, in hopes of stabilizing the market and preventing it from falling further. For example, the United States has a set of thresholds in place to guard against crashes. If the Dow Jones Industrial Average (DJIA) falls 2,400 points (threshold 2) before 1:00 p.m., the market will be frozen for an hour. If it falls below 3,600 points (threshold 3), the market closes for the day. Other countries have similar measures in place. The problem with this method today is that if one stock exchange closes, shares can often still be bought or sold in other exchanges, in which case the preventive measures can backfire.

Another way of stabilizing the market is for large entities to purchase massive quantities of stocks, essentially setting an example for individual traders and curbing panic selling. However, these methods are not only unproven, but may not be effective. In one famous example, the Panic of 1907, a 50% drop in stocks in New York set off a financial panic that threatened to bring down the financial system. J. P. Morgan, the famous financier and investor, convinced New York bankers to step in and use their personal and institutional capital to shore up markets.

Stock market crashes wipe out equity-investment values and are most harmful to those who rely on investment returns for retirement. Although the collapse of equity prices can occur over a day or a year, crashes are often followed by a recession or depression.

For a detailed lesson on market crashes and a history lesson on the most famous crashes from around the world, read The Greatest Market Crashes.

RELATED TERMS
  1. Crash

    A sudden and significant decline in the value of a market. A ...
  2. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) ...
  3. Stock Market Crash Of 1987

    A rapid and severe downturn in stock prices that occurred in ...
  4. Stock Market Crash Of 1929

    A severe downturn in equity prices that occurred in October of ...
  5. Flash Crash

    The quick drop and recovery in securities prices that occurred ...
  6. Splash Crash

    A hypothetical, more intense version of the flash crash that ...
Related Articles
  1. Financial Advisor

    Is the Stock Market Crashing? 5 Signs to Consider

    Learn about some signs of a potential stock market crash including a high level of margin debt, lots of IPOs, M&A activity and technical factors.
  2. Investing

    The Silver Lining of a Stock Market Crash

    A stock market crash isn't always bad news for investors. Here is the silver lining.
  3. Trading

    The Crash Of 1929 - Could It Happen Again?

    Learn about the series of events that triggered the Great Depression.
  4. Investing

    Examining Credit Crunches Around The World

    Market tops and bottoms have proliferated the financial markets throughout history. Learn how countries dealt with these tough economic periods.
  5. Investing

    The Two Biggest Flash Crashes of 2015

    A flash crash occurs when prices plunge in minutes, and then often recover just as quickly. Here are two major flash crashes that occurred in 2015.
  6. Insights

    Connecting Crashes, Corrections And Capitulation

    Even though crashes, corrections and capitulations are bad news for investors holding the stock, there are still ways to profit.
  7. Insights

    What Caused the Great Depression?

    Learn how government actions may have contributed to this major economic downturn.
  8. Investing

    October: The Month Of Market Crashes?

    In the finance world, October is a month to be feared, but is it justified?
  9. Financial Advisor

    Will This One Thing Trigger a Stock Market Crash?

    What are the odds that there will be a sovereign bond crash? And what would one mean for stocks?
  10. Personal Finance

    The Safest Way To Travel In 2015

    Many have wondered if it is actually safe to fly or if they'd be better off taking an alternative form of transportation. Here’s a look at the statistics.
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 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 >>
  3. 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 >>
  4. 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 >>
  5. How does the performance of the stock market affect individual businesses?

    Learn how stock markets affect individual businesses by influencing consumer spending levels and affecting the way companies ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center