Market crashes are jarring events that disrupt the global economy. Whether caused by speculative bubbles, overleveraging, or systemic financial failures, they are usually unpredictable and can cause fear-driven selling. The impact of a crash can last for years, causing recessions and economic hardship. Crash events may trigger a wide range of consequences, including frantic stock-market selloffs, bear markets, reduced business spending, and bankruptcies.
A global market crash is a sudden and steep drop in the value of shares, often triggered by a financial crisis or catastrophe. The collapse of the global financial system in 2008 was the most severe market crash in modern history. This was precipitated by the collapse of Lehman Brothers and a number of other large financial institutions and widespread fears that investors could lose money on subprime mortgages.
The Covid-19 pandemic, a surprise and unanticipated event, also caused a global market crash in 2020. Investors were unprepared for a massive shift in world economies, with lockdowns, economic uncertainty, and supply chain disruptions all contributing to the panic.
While it is tempting to believe that the market always recovers, history suggests otherwise. Knowing how to spot a market crash can help you avoid its devastating effects. While the causes of crash events are complex and varied, most follow a similar pattern. Like a line of dominoes, most crashes begin with a catalyst—perhaps disappointing economic data or a bankruptcy—that triggers a wave of selling. Once the selling starts, the effect can grow exponentially as investors abandon other assets in a desperate bid to get out of risky investments.