Crash market stock why
The crashing of the stock market can not be judged accurately by any of the economist of the financial analytics. There are few parameters that are observed for proving the logic behind the crash. The stock market is said to be crashed, when the losses booked by majority of the investors are in double digit and the stock prices have been lower as never before.
Reasons For Many Of The Stock Market Crash
- Derivative Trading - It is been observed that during the crash market scenario, the balance between the normal market trading and the derivative trading gets disproportioned. This leads to an imbalance in the stock prices and balancing these trading in not possible, as the sentiments of the investors are moving the market. Many of the companies have designed such automated trading software that the software automatically transacts the business after observing the factors.
- Computer Trading Computer trading can be in simple words be said as Program trading. The companies have designed such automated software, which transact the business, after calculating the various variables of the market. This has resulted in the crash of 1987 in the United States.
- Less Liquidity The trading mechanisms in the
financial markets can not deal with the large flow of selling orders, which
results in terminating many of the stocks from trading, due to selling
pressure. This adds to the panic situation in the investors and once the
trading of these stocks starts, it again feels the same pressure of selling. The insufficiency of the liquidity results in the crashing of the market and
adds to the panic pressure in the stock market.
- Trade And Budget Deficits Due to the trade and budget deficits, many a times the government of the country has to interfere in the foreign currency exchange for reducing the impact. Hence, when the foreign investors observe the large trade deficits, they try to secure their amount invested in the concerned nation. So, the pressure of selling is felt in the stock market and the local investors add to it. The interest rate increase in the economy is also been observed for creating the volatility in the market.
- Investment In Bonds - The bonds are the fix interest barring securities, which matures after fixed duration. So, when the interest rate of the bond s are more in any of the country, the foreign investors gets the safe haven to park their amount at the time of volatility in the stock market. So, when the foreign investors and the big investors of the country observes the volatile market, they sell a part of the securities and buy the bonds, for securing a part of there investment. The selling of the security in the market adds to the selling pressure in the stock market, which may lead to the crashing of the stock market.
- Overvaluation When the stock prices of the scripts are very high, it is believed that I add the fuel for crashing the market. The price to earning ratio and the price to dividend ratios are considered to be the parameter for judging the valuation of the company. However, when these figures are historically high, few of the crashes are been reported till now.
Overview
The above mentioned factors are few of the reasons that can cause the stock market crash. However, it can not be confirmed that which factor is going to affect the economy of the country and what may trigger the fear factors among the investors, which are believed to be the two main causes for crashing the stock market.
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