Stock Market Crash

A stock market crash refers to a phenomenon in which most stock prices in the stock market fall sharply without warning. Stock market crashes are usually the result of economic bubbles caused by massive speculation and are a social phenomenon caused by the herd effect. Because the P/E ratio is higher than a reasonable level, the selling behavior of a small number of people or negative news causes panic selling. The stock market crash will not only cause huge financial losses to investors, but also have a serious impact on the entire economy and society.

There have been many stock market crashes in history, such as the 1929 Wall Street stock market crash, 1987 Black Monday, the 2000 Internet bubble, the 2008 global stock market crash, the 2015 China stock market crash, etc. These stock market disasters all have some common characteristics and precursors. If they can be identified and analyzed in time, it is possible to avoid or mitigate their impact. Here are some common stock market crash warning signs:

Market overheating: When the stock market continues to rise, investor confidence is high, and the market experiences phenomena such as over-buying, over-borrowing, and over-speculation, a bubble may form. The bigger the bubble, the higher the risk of bursting. Generally speaking, when the market's average price-to-earnings ratio is much higher than the historical average, you need to be more vigilant.

Rising interest rates: Interest rates are one of the important factors affecting the stock market. When interest rates rise, the cost of capital increases, corporate profitability declines, investors receive lower returns, and demand for stocks decreases. In addition, rising interest rates will also stimulate the bond market and attract some investors to switch from the stock market to the bond market. Therefore, rising interest rates usually put pressure on the stock market, and if interest rates rise too fast or too high, it may trigger a stock market crash.

Policy changes: Policy is another important factor affecting the stock market. Changes in policy will have an impact on market expectations and confidence, thereby affecting stock price trends. For example, the government may intervene or regulate the market by adjusting taxes, money supply, trade relations, etc. If policy changes are too sudden or are not conducive to market development, they may cause market panic or resistance.

Negative events: Negative events refer to emergencies that have an adverse impact on the market, such as wars, terrorist attacks, natural disasters, epidemics, scandals, etc. These events will threaten the stability and security of the market, trigger panic among investors, and lead to large-scale selling. The impact of a negative event depends on its severity and duration. If the event continues to ferment or expand, it may trigger a stock market crash.

Technical indicators: Technical indicators refer to data and charts used to analyze stock market trends, such as moving averages, trend lines, trading volume, volatility, etc. Technical indicators can help investors judge the strength and direction of the market, as well as find key locations such as support and resistance. When technical indicators show signs that are not conducive to the market, such as falling below key support levels, forming a death cross, or forming a head and shoulders top, it may indicate that the stock market is about to collapse.

Of course, the above signals do not necessarily lead to a stock market crash, nor do they all appear at the same time. Investors need to judge market risks and opportunities based on the actual market conditions and combined with multiple aspects of information and analysis. If there are signs of a stock market crash in the market, investors can take some of the following measures to prevent and respond:

Reduce borrowing: Borrowing is a method commonly used by investors in the stock market. It can amplify returns, but it can also amplify risks. When the stock market falls, borrowing investors may face the risk of default or margin calls and be forced to close or increase their positions, further driving the stock price down. Therefore, borrowing less is a conservative and wise approach when the stock market is unstable.

Diversification: Diversification refers to allocating funds among different asset classes, industries or regions to reduce risk and increase returns. When the stock market declines, diversification can reduce the impact of a single asset or market and protect the value of your portfolio. Diversification can be achieved by buying different types of stocks, bonds, funds, commodities, foreign exchange, etc.

Set stop loss: Stop loss refers to setting a predetermined price or ratio in investment. When the stock price reaches that price or ratio, stocks are sold automatically or manually to limit losses. Stop loss can help investors avoid emotional decisions, exit the market in time, and retain funds. Stop loss can be achieved by setting limit orders, trailing stop orders, etc.