We’ve all heard the phrase “timing is everything”, and the stock market is an obvious place where this holds true. Just look at those famous historical stock market crashes and imagine how investors would have felt at the time if they failed to recognise the signs leading toward the crash. Luckily we can now arm ourselves with an understanding of stock market crashes, to avoid the pitfalls of bear markets and make better investment decisions. So investors, let’s explore what causes stock market crashes and how bear markets can affect your shares.
The stock market will crash when the number of sellers outweighs the number of buyers; essentially when there is too much supply and not enough demand. When investors aren’t buying, stock prices will fall accordingly. In a desperate attempt to reduce a loss of profit, investors will quickly sell off their stocks, and as they become harder to sell, will keep dropping the prices. With everyone selling at the same time, the value of the market declines, which can then ultimately lead to a crash.
When the stock market’s value drops, usually an internal factor is the catalyst. This is classified as negative data or ‘bad news’, such as a sudden change in mortgage rates or increase in oil prices. Occasionally an external factor is to blame, like 9/11 and more recently, Hong Kong’s Umbrella Revolution, but this type of incident makes up less than 20% of the market’s downfalls.
A bear market occurs when the market is on a similar decline, and the price of shares are dropping and have been for an extended period of time. As the beginning of a bear market cannot be predicted, neither can its demise. This results in economic downturn, as companies make profit when people are buying from them.
It is important to have a plan in place to protect yourself from loss before a bear market occurs. Mechanical investing software, offered by Share Wealth Systems can be a great tool to help make more calculated decisions based on timing to increase your chances of avoiding a bear market. If you are planning on entering the stock market for the first time, don’t do so mid-bear market. Just be patient and keep a close eye on the market. The bear will eventually pass and you will be timed back into the market when the conditions are safer.