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A financial crisis is a situation in which the values of assets drop rapidly.

Investors often panic during a financial crisis. They sell off securities or pull money from bank accounts because they believe the values of those assets will plummet if they remain at a financial institution.

Bubbles, banking crises, and stock market crashes often precipitate a financial crisis. Periods of prosperity sometimes precede them. The Great Depression of the 20th century began in 1929 with a stock market crash from previously record-high levels. The financial crisis that began in 2007 started when the real estate bubble burst and many high-risk mortgages defaulted.

If assets are overvalued, wide selloffs can make the situation worse, leading to a loss of wealth and possibly recession or depression. Financial crises occur for different reasons and they are difficult to forecast. But investors can brace for rough times by remaining well informed and prepared. They can research individual companies and sectors to know who stands to lose, or possibly gain, during a crisis.

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