Market Crashes and Bubbles

A bubble is an investment phenomenon which demonstrates certain aspects of human emotional weakness. A bubble arises if an investor sets too much demand for the stock that the price is already driven beyond any rational reflection of its actual worth. The bubble must be determined by the company’s performance. Like when a child plays to blow the soap bubble, investing bubbles mostly occur as if they will rise continually. On the other hand, as it is not formed by any substance, sooner or later it will pop. As the bubble pops, the invested money follows.

A crash is a straight decline in the total market value, it is identifiable just like the popping of a bubble,  creating a scenario where most of the investors are trying to flee the market as significant losses are at the same time incurred. In an attempt to prevent bigger losses, investors amid a crash engages in panic selling, with hopes up to unload their weakening stocks onto other investors. Basically, this panic selling contributes to the falling market, which will crash eventually and will create a great impact. A depression comes next to a stock market crash.  

Bubbles and crashes are related and is similar to clouds and rain. You can have clouds without rain, but you cannot have rain without a cloud. Bubbles signify clouds and market crashes are like the rain. In history, a market crash is often precipitated from a bubble (pun intended). If the clouds are thicker or the bubble is bigger, the harder it will pour rain.

The idea of the crash and a correction is important to know, which can be a little bit confusing at times. The market’s way of putting sense into enthusiastic investors is a correction. Generally, a correction should not go beyond 20% loss of value in the market. In fact, some crashes were mistakenly regarded as corrections, such as the alarming crash of 1987.  A “correction” on the other hand, should not be labeled as such unless the steep drop stops in a period. 

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