There's been a wide range of media selling this idea that we are in stock market crash. So, are we in one? What would it mean if we were? What is a stock market Crash? Read today's post to find out!
What is a Stock Market Crash?
Investopedia describes a stock market crash as:
A stock market crash is a rapid and often unanticipated drop in stock prices. A stock market crash can be a side effect of a major catastrophic event, economic crisis, or the collapse of a long-term speculative bubble. Reactionary public panic about a stock market crash can also be a major contributor to it, inducing panic selling that depresses prices even further.
So, a Stock Market crash is when all the stock prices go down. If the stock market was to drop as a whole (not just your stocks) in the double digits, over just a few days - this could qualify for a stock market crash.
What would it mean if we were in a Stock Market Crash?
The impact of a stock market crash can be catastrophic. Some of the most common effects are:
Demand dropping and so naturally prices increase
Less revenue due to less demand meaning more people lose their jobs
Less employment = less money circulating
So, Are we in a stock market crash?
I think that the first thing to clarify is that natural market dips or corrections are NOT the market crashing.
Businesses naturally go up and down. Some succeed and some die. Examples of some of these who aren't performing as well as they used to, are:
Video Stores (VideoEzy)
The failures of these businesses did not occur due to a stock market crash. Rather, competitor businesses grew and bumped these ones out of the way. For example, Netflix came along and a demand for video stores was no longer needed. So naturally, if you owned stocks in any of these companies, they would have decreased in value. This is natural and one of the risks of investing in individual stocks.
I believe that we are in a Market correction at this point as opposed to a Stock Market Crash.
A Stock Market correction is when stocks decrease in value and can sometimes be confused with a stock market crash. Whilst in the short term a stock market correction can be scary, and it can influence the decrease in value of your stocks; it can also mean something positive. Generally, overvalued stocks are managed to decrease in price to make them more affordable, meaning that in a correction stocks go on *sale* :)
Reactions are really important when investing. If you pull out and sell your stocks every time the market corrects itself, you will miss out on the big picture growth that occurs with time in the market. Overall, the market grows over time. It has never had a crash that it has not recovered from. So, if you're following a basic set of rules when it comes to investing such as only investing what you can afford, not going in to debt to invest, then you'll be safe.
As you can see above, the stock market has minor corrections every so often. Those corrections at the time scare people and cause them to sell. The important concept to understand is that the current climate is not a prediction of the future. By researching in depth you will be able to see that over time, the market increases in value.
We've got this!