Stock markets function as secure and regulated arenas where interested participants can engage in transactions involving shares and other financial instruments. Nevertheless, involvement in the stock market carries a certain level of risk. Share markets can be volatile. The foremost apprehension shared by every investor pertains to stock market crashes and the potential implications for their investments.
What causes the stock prices to change?
Stock prices are subject to complex factors that collectively influence the market dynamics of supply and demand. To address the pertinent query of “Why is the Indian stock market falling today?”, let’s delve into these influencing elements.
Firstly, a company’s fiscal well-being and ability to generate profits play a prominent role in whether the share market goes up or down. Secondly, the broader economic landscape has a considerable impact on investor sentiment. Metrics like Gross Domestic Product (GDP) growth, unemployment rates, and inflation can influence the market’s mood. Alterations in interest rates directly affect borrowing costs for both companies and individuals.
Among the complex reasons why shares are going down, the impact of company-specific events cannot be avoided. Announcements regarding product launches, mergers, acquisitions, shifts in management, or legal entanglements hold the potential to considerably impact a company’s stock price. Finally, the global stage, rife with geopolitical events, international conflicts, and macroeconomic trends, introduces an element of unpredictability.
What is a stock market crash?
A stock market crash is a sudden and severe decline in stock prices across a significant portion of the market, leading to a sharp and rapid drop in the overall value of stock indices. Key features of a stock market crash include:
- Rapid and substantial decline: Stock market crashes involve a swift and significant decrease in the prices of many stocks, often over a short period, resulting in double-digit percentage declines.
- High trading volume: Crashes are accompanied by unusually high trading volumes as investors rush to sell their holdings. The surge in trading activity can overwhelm the market’s capacity to absorb orders, leading to increased volatility.
- Widespread impact: Stock market crashes affect a broad range of stocks and sectors, often extending beyond a specific industry or region.
- Investor panic: Fear and panic tend to take hold during crashes, prompting investors to sell in an attempt to limit their losses. This mass sale can exacerbate the downward spiral.
- Catalysts: Crashes can be triggered by various events, such as economic recessions, financial crises, geopolitical tensions, unexpected corporate failures, or sudden changes in market sentiment.
What should you do when the share market is down?
It’s essential to approach the share market going down with a calm and strategic mindset. Here are some steps to consider.
- Stay calm and avoid emotional reactions: It’s natural to feel uneasy during market downturns, but making impulsive decisions based on fear or panic can lead to greater losses. Avoid making emotional reactions like selling off all your investments hastily.
- Review your portfolio: Look closely at your investment portfolio. Assess the sectors and individual stocks that are most affected by the downturn. Consider whether your initial investment thesis still holds true or if any adjustments are needed.
- Diversification matters: A well-diversified portfolio is less susceptible to extreme price changes from the share market going down. Ensure your investments are spread across different sectors, industries, and asset classes to mitigate risk.
- Focus on the long term: Remember that investing is a long-term endeavour. Market downturns are often temporary, and history has shown that markets tend to recover over time. Stay focused on your long-term financial goals rather than short-term fluctuations.
- Rebalance if necessary: A market downturn might cause your asset allocation to drift from your intended targets. Consider rebalancing your portfolio by selling some of the investments that have performed well and allocating funds to those that have declined.
Most significant stock market crashes in India
We often wonder, “Why is the market down today?” Every investor must understand the historical context, including some of the most significant market declines that have shaped the trajectory of our financial landscape.
In 1992, India’s stock market crashed due to broker Harshad Mehta’s securities scam involving stock price manipulation. This led to a 12.77% BSE surge, followed by a decline. In 2004, UBS’s selling orders for undisclosed clients caused an 842-point drop, as revealed by a SEBI investigation.
In 2007, the brutal crash saw SENSEX plunge, including a 617-point drop on April 2nd and a 615-point fall on August 1st – among the third-largest losses. 2008’s global recession led to a 1408-point BSE fall, including a 1,070-point crash on October 24th.
From 2015–2016, SENSEX dropped 854 points on January 6th and 1,624 points on August 24th due to economic slowdowns in India and China. Factors like rising NPAs and demonetisation caused more crashes.
2019 witnessed a 400-point SENSEX dip and a 10,850-point NIFTY crash due to the US Federal Reserve’s actions, economic slowdown signs, and disappointing earnings. This caused significant investor wealth losses.
The 2020 COVID-19 pandemic caused a notable stock market crash. Lockdowns and uncertainty led to a sharp decline in India’s markets. Resilient investors focusing on investment fundamentals eventually benefited from the market’s resurgence.
Conclusion
If you’re wondering why the share market is going down, you must remember that stock market crashes can stem from a complex interplay of factors. These include market manipulation, economic downturns, global events, unexpected policy shifts, and investor sentiment. The history of stock market crashes illustrates how vulnerabilities in financial systems, coupled with external shocks, can lead to sharp declines. Recognising these factors and their potential impact is crucial for investors, regulators, and policymakers to mitigate risks and promote stable market conditions.
