A crash is a drop in the aggregate total value of a market, which in turns creates a situation where most of the investors are trying to escape the market at the same time and this consequentially results in incurring significant losses. In order to avoid further financial setbacks, investors hope to unload their burden of declining stocks onto other investors. This panic wave contributes to the declining market, which ultimately crashes and affects everyone. A crash in the market is typically followed by a depression.
As you know, a stock market is simply a medium of exchange of stocks, a stock-exchange. A stock, business wise, is the capital raised by a business or corporation, through the issue and subscription of shares. Over the last few years, several large and critical stock market crashes have beleaguered not only the American financial systems but also its counterparts in other countries’ economies. For instance, in the Great Depression of 1929, the prices of the stock dropped to a 10% low of their previous highs while during the Crash Of 1987, the market drastically fell by more than 20% in one day.
How stock values can influence wealth
Owing to the measures of how stocks are traded, investors can lose a good amount of money if they fail to understand how stock values can influence their wealth. In a layman’s language, shareholders buy their shares at some price and can then sell them off at higher amounts so as to realize capital gains.
On the contrary, when market forces are not in favour of the investors, the share prices may fall relentlessly and the sale transaction now would only result in a loss. Let’s say, an investor purchases 1,000 shares in a company for a total of Rs 20,000. Due to a crash in the stock market, the price of the shares drops by 75%. As a result, the stakeholder’s position now falls from 1,000 shares worth Rs. 20,000 to 1,000 shares worth Rs, 5000. In this situation, if the investor wants to sell the position, they will incur a net loss of Rs 15000.
Will the market fall in 2016?
One of the biggest myths regarding the stock market is that it can be timed. No, one can simply not time the market. Will the market fall in 2016? No one can answer it. That the market is highly sensitive goes without saying. When majority investors are generally small, individual shareholders aim to make quick profit, acting on tips. That is what happens in the Indian markets. A foreign market, on the other hand, is dominated by big institutional investors, who are committed into this for longer periods and therefore it is relatively more stable.
In the recent few years, the Indian market has been able to attract these big investors what with Government backed schemes like Make in India, and StartUp India. The two leading Republican candidates for president, namely Donald Trump and Cruz have warned that the U.S. stock market is trading at an alarming level. It is quite obvious that the ripple effect of this happening will be overtly seen in our markets as well.
Factors that are responsible for the massive sell-off
On a personal front too, Indian stock market has several other factors that are responsible for the massive sell-off in India off late like:
- Non-performing Assets: No matter what kind of a policy an organization follows, if its financials are weak, it is deemed to fail eventually. This is what is happening in India. Investor’s have been losing interest in the Indian markets owing to its ever increasing NPAs and bad loans of the public sector banks
- The crude oil crash: Crude oil has crashed over 80% in 18 months to $27 a barrel. It is predicted by experts that it might fall to $20 a barrel. This will certainly have a lasting impact on not only developed but also developing economies, and has already hindered growth of countries like Brazil, China and Russia. India has also been affected by it since this commodity is an integral part in the manufacturing process and without production any economy will stumble down.
Finally, a noteworthy investor into Indian equities, Adrian Mowat, has also stated that the state of the global economy as well as the Indian stock Market is highly volatile now, far from its previous stability in the past years.