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A Review Article on Stock Market Crashes a Stock

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A Review Article on Stock Market Crashes a Stock A Review Article on Stock Market Crashes A Stock Market crash is an unexpected decline in the prices of stock which spread over a substantial section of a market resulting in loss of investors' wealth. They are the result of the panic in the mind of investors as well as economic factors. Stock market crashes often are accompanied by the economic recession, speculations, high unemployment which leads to the financial crisis. CAUSES OF MARKET CRASH: A double-digit percentage fall in the stock market index is termed as a Market crash. A market crash can occur due to a variety of reasons which may include · Speculation · Excessive leverage · Interest rates and inflation · Panic Speculation Excessive Leverage - Agressive trader attitude - Includes continuous selling - Related to a specific asset class - Investors are forced to sell more - Trading in high risk shares - Convert market correction to crash Causes of Market Crash Interest Rate and Inflation Panic - Impacts borrowing power - High Speculation - Low Corporate profit - Economic Instability - Increase in stock volatility - Political issues GLOBAL MAJOR STOCK MARKET CRASHES: 1673 Tulip Mania: The crash in Netherland’s tulip bulb market which was also known as 'tulipmania' was one of the most famous crashes of all time. It led to the bursting of the market bubble in the mid 1600s when speculation raised the value of tulip bulbs to high extremes. Soon the Dutch started trading their land, assets for buying the bulb of tulip. However, in 1673 due to chain effect, people started selling the bulb to book profits. No one was ready to buy tulip, as a result, there was oversupply and the market kept falling. 1873 Vienna Stock Exchange: The fall of the Vienna stock exchange led to the crash of stock markets even to other parts of Europe, it was caused due to speculation and panic selling. Economist gives different reasons for the fall like the demonetization of silver in Germany and the United States, American inflation, Franco-Prussian War, etc. 1929 Wall street Crash: During the 1920s the US stock was overvalued, and they reached their peak by 1929. But the economic conduction like rise in unemployment, low wages, struggling agriculture did not support it. However, on 21st Oct 1929, there was panic selling of shares and history was created where over sixty-four million shares were traded on the New York Stock Exchange in a single day. There was a loss of USD 14 billion on that day. 1987 Black Monday: A fall of 508 points was seen in Dow Jones Industrial Average index which was the biggest drop in a single day in history. Extreme conflicts in the Persian Gulf region, the expectation of high-interest rates, the continuous bull market for five years without a correction, and the start of the computerized trading were regarded as the prime causes of the crash. STOCK MARKET CRASHES IN INDIA: 1992 Harshad Mehta Scam: Harshad Mehta was a stockbroker and was responsible for the 1992 crash of Indian stock markets by siphoning off approx. Rs 1,000 crore from the financial system in order to buy stocks from the Bombay Stock Exchange. He was known as Big Bull of the stock market and all the retail investors followed his footsteps and kept on buying stocks. In a short period of one year, he managed to manipulate the Sensex by almost 275 percent and markets rose from 1000 points to 4000 points. When the State Bank of India found a deficit in government securities his scam came to picture. The investigation showed that Harshad Mehta managed to manipulate approx. Rs 3,500 crores in the financial system. On 6th August 1992 the markets crashed by 72 percent after the scam was exposed which led to one of the biggest falls in the Indian stock market. Reforms: The major structural change was the formation of the NSE ‘National Stock Exchange of India’. While in the financial sector it led to the formation of CII Code for Desirable Corporate Governance. Two committees were formed in order to review the performance of Indian corporate governance and share recommendations to improve it. Sensex drops in percentage terms: 2004 Change in Government: On May 17, 2004, the Bombay stock exchange crashed by 842 points which were the biggest single-day crash in the history of Indian markets. The unexpected defeat of the NDA and a meltdown of stock markets in emerging sectors led to the market crash. SEBI launched an investigation against Goldman Sachs for irregularities in trading however gave them a clean chit in 2008. 2008 Financial Crisis: The financial crisis in 2008 was fuelled by the deregulation of the financial industry that permitted banking institutions to involve in trading of hedge funds using derivatives. Interest-free loans were provided which the subprime borrowers could afford that helped in getting more mortgages for derivative trading. The derivatives markets fell in value and the banks stopped cross lending to banks. The fall of the US housing bubble along with the Lehman Brothers’ downfall crushed the entire world’s financial system. It resulted in a crippling effect and stock markets across the world went down and the world economy entered the recession. 2020 Covid19: With the ongoing pandemic of Covid-19 the fears of the global recession are increasing, The Indian market crashed in March by almost 30%. The markets closed lower as compared to its Asian pears i.e. Hong Kong and Shanghai Stock index. This also indicated that the spread of virus looms large in India. The markets are volatile as the pandemic spread is still in its Stage 2 in India and is expected to further impact the economy due to lockdowns in the manufacturing companies. Many companies indicated that they would shut down their facilities MITIGATION STRATEGY: Financial regulators use ‘circuit breakers’ to prevent the stock market crash. Circuit breaker initiates a halt in trading of both cash and derivative market. The circuit breaker was first used in US in the year 1987 and they were incorporated in the Indian stock exchanges in the year 2001 with the purpose to avoid both speculative profits and sudden losses within a short period. Trigger limit Trigger time Market halt duration Pre-open session Before 1300hrs Forty-Five Min Fifteen Min At or after 1300 hrs At 10% Fifteen Min Fifteen Min upto 1430hrs At or after 1430hrs No Pause Not applicable Before 1300hrs One hour Forty-Five min Fifteen Min At or after 1300hrs At 15% Fifteen Min Fifteen Min before 1400hrs On or after 1400hrs Closed for the day NA At 20% Any given time Closed for the day NA By: Dr. Meenakshi Malhotra (Assistant Professor, DR VN BRIMS) .
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