The stock market has been the heart of global finance for over a century, but sometimes it also skips a beat. From the catastrophic crash of 1929 to the Indian stock market scam of 1992, and the COVID crash of 2020, history tells a chilling story: markets that rise too high eventually fall.
Stock market crashes are part of the investing journey, and how you react makes all the difference. In this blog, we’ll explain what a stock market crash is, what causes crashes, their consequences, different investment strategies to handle them, and the role of the central bank during stock market crashes.
Table of Contents
What is a Stock Market Crash?
An unexpected or sudden drop in major stock market indices like the Nifty 50 or BSE Sensex is known as a stock market crash. It is generally caused by panic selling, economic downturn, or external shocks, leading to a loss of investor confidence. It can occur within a short period, such as a day or week.
Stock Market Crashes are often characterized by a sharp double-digit percentage drop in a stock index over a brief period, although there is no strict definition. A stock market drop can have crucial economic consequences, even for the global stock market.
Causes of Stock Market Crashes
Some of the causes of a market crash are as follows:
1. Inflation and Interest Rates
High inflation has a major influence on people’s purchasing power as the prices of goods and services rise aggressively over time. To control inflation, the central bank increases interest rates to make lending more expensive. Further, the profits of companies start decreasing, which leads to a drop in stock prices. Seeing a fall in the price of stocks, investors move their money out, affecting the market more for this reason.
2. High Debt Levels
There is a term called excessive leverage, which means borrowing money from somebody to invest. Imagine you borrow money from a friend to invest in stocks, and during market booms, you can get higher profits. But when the prices fall, you face difficulty repaying the loans. So, to pay back the loans, you will have to sell the stocks as soon as possible. A likely scenario is that many investors can do the same, creating panic in the market.
3. Tax Regulation Changes
The actual value of income declines even if the taxable income remains the same when inflation rises. Therefore, you can adjust the taxes to ensure that they account for inflation, which can help to lessen the effect. But these adjustments, in addition to other influences like recession and an increase in interest rates, can lower investor confidence and add to market fluctuations.
4. Political and Geopolitical Changes
Sudden policy changes, elections, trade disputes, and diplomatic tensions can create uncertainty in the stock market. Such events often shake investors’ confidence, increase volatility, and sometimes trigger broader market declines.
Consequences of Stock Market Crashes
The stock market crashes cause pain not only for traders and investors but also spread far and wide to affect many aspects of life and business. Jobs, corporations, savings, and even governments feel the sharp decline in market values. Some of the effects that follow are listed here.
1. Economic Slowdown
Investor confidence can be shaken by a market crash. When the panic hits, companies cut back, and consumer spending takes a nosedive, the economic slowdown that we often call a recession seems to start hitting Main Street in a way that we can see and feel.
2. Banking and Credit Troubles
When stock prices fall sharply, banks and lenders often tighten lending, leading to a shortage of funds. Businesses and individuals may struggle to access credit, which can slow economic growth. In severe cases, financial institutions may face insolvency as seen during the 2008 global financial crisis.
3. Rising Unemployment
After losing worth and encountering a downturn in sales, many firms respond by laying off employees. Job cuts lead to heightened levels of hiring freezes and unemployment, unemployment that often rises quite dramatically.
4. Panic and Fear
Panic spreads among investors when the stock market crashes. They hear the news and get scared about how much more money they’re going to lose. Investors rush to sell, worsening the downturn. By no means are the consequences of a crash confined to the stockholders, either. A lot of people who worry in this situation don’t have any stocks but do have jobs that are affected by what happens to the economy.
5. Corporate Instability
Companies that are publicly held witness a decline in the worth of their shares, which leads some to delay flotation plans, curtail growth, and even discontinue projects. For small businesses and startups, the aftermath of a crash is particularly hard. They find it nearly impossible to raise funds when investors are skittish, and many are forced to implement cost-cutting measures.
Major Stock Market Crashes in India
Over the decades, India has faced major market crashes, from the Harshad Mehta Scam and the 2008 Global Financial Crisis to the 2020 COVID Pandemic Crash. Let’s talk about these in detail:
1. Scam of 1992
The scam of 1992 was done by Mr. Harshad Mehta, which involved using banking gaps for stock market speculation. Mehta and his partners found different ways to exploit bank funds for stock price manipulation. The Sensex dropped by 12.77% i.e., 570 points, on April 29. Harshad and his partners pulled out around ₹4000 crore from the Indian banking system.
2. Global Financial Crisis: 2008
In 2007, the US subprime mortgage breakdown, which later grew into an intense international banking crisis, with the sudden announcement of bankruptcy by Lehman Brothers on September 15, 2008. It caused widespread panic worldwide, and Foreign Institutional Investors pulled cash out of India. BSE Sensex dropped by 61.5%, i.e., from 21,206 to 8,160. Crores of money vanished, but India’s banks held firm. The Sensex rebounded by 2010, proving that determination pays off.
3. China Panic 2015
The Chinese stock market crashed on June 12th, 2015, and over 30% of the value of Class-A shares was wiped away within just three weeks. On 27th July, 2015, the market had its biggest drop since 2007 by 8.5%. There was another 8.5% decline on August 24th, 2015, a day remembered as ‘Black Monday’, followed by ‘Black Tuesday’ on August 25th, 2015, when the market dropped over 7.6%.
China’s yuan collapse had a great impact on global markets, including India. BSE Sensex fell by 5.94%, which is around 1,624 points, and approximately ₹7 lakh crore was lost in a day.
4. 2016 Demonetisation
On 8th November 2016, Prime Minister Modi announced a ban on ₹500 and ₹1,000 currency notes, which shocked everyone. Investors panicked, and the rupee took a hit, and Trump’s election added to market uncertainty. The BSE Sensex fell approximately 1689 points (6.12%), wiping out ₹3-4 lakh crore in market value. Cash-dependent sectors like real estate were particularly affected. Gradually, the market recovered in 2017.
5. 2020 Covid Pandemic Crash
During the COVID lockdown, the market went into panic, triggering circuit breakers. In March, as soon as the market opened, the BSE Sensex dropped by 8.18%, closing over 2,919 points, initiating a circuit breaker. As per the intraday records, the Sensex has its highest one-day decline, crashing as far as 3204 points. There was a 140% Nifty surge in late 2021, proving that the markets can bounce back fiercely.
6. Election and Global Fallout 2024-2025
- Indian Market Decline: Since September 2024, the Nifty dropped by 13% and the Sensex declined by 11.79% (10,000+ points), wiping out ₹ 83.5 lakh crore ($1 trillion) in market value in just 4 months.
- Political Factors: The BJP’s seat count dropped to 200, half of the expected 400, creating political uncertainty.
- Global Factors: Donald Trump’s tariff threats led to significant foreign institutional investor (FII) outflows, totaling ₹2.96 lakh crore in 2024.
- Investor behaviour: Panic selling, particularly in mid and small-cap stocks, worsened the market decline.
Different Investment Strategies for a Volatile Market
Markets are never the same. It has its highs and lows, so it is completely normal to feel uneasy about your investments in volatile markets. Knowing how to invest during a crash can help protect your portfolio. Here are a few key investment strategies for volatile markets:
1. Define your investment approach
Having a solid investment approach makes market volatility more manageable. But how do you create your strategy? Where to start from? Don’t worry, we will help you with this. You need to understand and know well about your goals, investment timeframe, and risk appetite.
Next, your primary goal is to collect enough savings to retire without worrying about money. Lastly, risk appetite shows your broader financial situation, your savings, earnings, debt, and how you feel about it all. You can choose the plan or funds wisely if you know all the above details accurately.
2. Portfolio Rebalancing
Review your portfolio quarterly or at least annually to ensure your asset allocation aligns with your goals and risk appetite. For example, if stocks now make up 60% of your portfolio but your target is 50%, sell sme equity and increase bonds or other assets to rebalance.
3. Diversification
Spread investments across different sectors, geographies, and asset classes. A conservative investor might allocate: 50% bonds, 30% domestic equities, 10% international equities, and 10% alternative assets. A more aggressive investor could have 70% equities, 20% bonds, and 10% alternatives. Diversification reduces the impact of a single market downturn.
4. Plan long-term Investments
If you are investing to build a huge corpus for the future, it is best to invest in long-term investments instead of short-term ones. Market conditions are never the same; they keep fluctuating. But it has been observed that investing for a longer period has decreased the risk of holding a diversified stock portfolio.
5. Dollar Cost Averaging (Power of Averaging)
Invest a fixed amount at regular intervals regardless of market fluctuations. For example, invest ₹1000 every month in a stock mutual fund:
Month 1: ₹1000 buys 10 units at ₹100 each.
Month 2: ₹1000 buys 20 units at ₹50 each.
Month 3: ₹1000 buys 40 units at ₹25 each.
Over time, the average cost per unit is lower than if you invested ₹3000 all at once, reducing the impact of volatility.
The Market Crash Cycle: Bull to Bear Markets
A stock market crash is a part of a cycle that involves a bull market, a stock market bubble, and a bear market.
Market Cycle Flowchart:
Bull → Bubble → Crash → Bear → Recovery
Bull markets can lead to a crash, caused by a positive economic outlook and rising stock prices. It can inflate a market bubble when confidence turns into overconfidence. It happens when the prices increase far beyond their actual worth.
Ultimately, it’s too late when investors sense something troublesome with price and reality, panic sets in, and the bubble bursts. Investors get into a hurry to sell off stocks, marking the market crash. It can also result in a bear market, i.e., stock prices are declining and negative sentiment, which can lead to wider economic outcomes, including a recession.
Key Factors to Consider Before Investing
Before investing in any asset, you should be well-educated about certain factors. These factors have a significant impact on financial success. Here’s a detailed checklist to help you make an informed decision:
1. Know Your Financial Situation
- Your Investment Purpose: It simply means: what are you investing in? education, retirement, to buy a home, or wealth growth?
- Emergency Fund: Do you have a few months’ living expenses saved?
- Debt: Pay off your personal loan or credit card debt first.
- Time-frame: Long-term investments allow more aggressive investing, whereas shorter need careful handling.
- Risk Appetite: Every investment comes with its own risk. How comfortable are you with market fluctuations and potential losses?
2. Investment Type
Investing in stocks, the things you should research are:
- Start by learning about the basics: what is stock market is and how it works.
- Company fundamentals like earnings, debt, revenue, and growth.
- Type of industry and sector.
- Grab knowledge about valuation metrics like P/B ratio, P/E ratio, ROE, etc.
- Check the stock market chart live to get real-time price data and for technical analysis. You can use platforms like TradingView, Yahoo Finance, etc.
Investing in bonds, the things you should research are:
- Credit ratings from AAA to junk.
- Maturity period and interest rate sensitivity.
- Issuer’s financial strength.
Investing in mutual funds or ETFs, the things you should research are:
- Administrative fees, expense ratio, and other management fees.
- Fund performance history, how it performed in the last 5-10 years.
- Active vs. passive management.
- Holdings and asset allocation.
Investing in other Investments like REITs, Crypto, Commodities, etc., the things you should research are:
- Regulatory environment.
- Tax treatment.
- Market unpredictability.
- How easily can you sell your assets?
3. Look into Fees and Costs
Check all costs associated with your investments, including:
- Brokerage or commission charges.
- There are expense ratios for mutual funds/ETFs.
- Other expenses like bid-ask spreads, front-load or back-load fees, etc.
4. Study the Tax Implications
- Short-term capital gains or long-term capital gains tax rates.
- Dividends are taxable depending on your income and account type.
- Use IRAs, 401(k)s, or similar options when possible.
5. Invest in Different Assets
- Do not invest all your money in one asset.
- Allocate your investments across different asset classes (stocks, bonds, cash, alternatives), geographies (domestic and international exposure), and sectors.
6. Observe Market Conditions and Economic Indicators
Always keep yourself up-to-date about:
- Changes in interest rate.
- Inflation levels.
- Economic cycles (e.g., recession or expansion).
- Geopolitical events affecting markets.
7. Use the Right Research Tools
Equip yourself with credible information from:
- Financial Platforms like Yahoo Finance, Morningstar, Bloomberg, and Eightcap.
- Read company disclosures such as annual reports, including balance sheet, corporate governance report, profit and loss account, directors’ report, etc., and investor presentations.
- Analyst Reports and Ratings.
- News and Economic Data Sources.
Stock Market Correction Vs. Crash
Many investors confuse a correction with a crash. Here’s the difference between correction and crash in India, so you can respond appropriately to market movements.
| Point of Distinction | Stock Market Correction | Stock Market Crash |
| Duration | Corrections generally happen for a short period. | A Crash is typically longer and can affect the market severely. |
| Market Impact | As these take place for a short time so it is seen as market adjustments to economic changes. | It has a significant impact on the market and is often characterised by panic selling. |
| Decline | It is a drop of 10-20% in stock prices from recent highs. | A sharp drop of more than 20% in stock prices from recent highs. |
| Investor Sentiment | This is a time when investors are more cautious about their shares, and it is the best opportunity for investors to buy shares at low prices. | Investors lose confidence during the time of a crash and start selling their stocks in panic. |
Role of Central Banks in Market Crashes
The Central Bank of India – RBI plays an important role in maintaining financial stability and avoiding market crashes through various techniques:
1. Monetary Policy
The central bank uses interest rates and quantitative easing to stabilise the economy and prevent market volatility. For instance, during the COVID-19 market crash in March 2020, the RBI cut repo rates and enhanced liquidity in the banking system to support lending and stabilize markets. They simply lower the rate of interest to boost borrowing and spending, as well as inject liquidity into the market by buying assets to balance asset prices and prevent economic downturns.
2. Lender of Last Resort
During periods of financial stress, the RBI acts as a lender of last resort by providing emergency funding to banks and financial institutions to prevent widespread collapse. In 2020, this included targeted long-term repo operations (TLTROs), which ensured banks had sufficient liquidity to continue lending and support the economy.
3. Regulatory Oversight
Every financial institution has to follow the Central Bank’s guidelines. In India, the RBI supervises the institutions to make sure they have enough capital and are managing risk properly.
4. International Cooperation
The central bank cooperates with other regulatory authorities to manage worldwide risk to the financial system.
Conclusion
Finally, remember that the stock market crashes are often short-term pullbacks. With a certain investment strategy, you can survive the market crash without worrying about your assets. Long-term investment strategy, diversification, analysing your portfolio regularly, rebalancing, and staying updated about current market trends can help you achieve your financial goals. Even when markets fall, staying calm and focused on your long-term goals makes all the difference
Stock Market Crash – What Is, History, and Examples – FAQs
1. How does a stock market crash affect the economy?
Stock market crashes can have a significant impact on the economy, which can lead to company failures, layoffs, and a decline in consumer spending.
2. What to do in case the market crashes tomorrow?
If the market crashes tomorrow:
1. Avoid Panic Selling: Firstly, do not sell your assets in panic, as it locks in losses.
2. Hold quality stocks: Blue chips like Hindustan Unilever, TCS, ITC, with strong fundamentals.
3. Opportunity to Buy: You can use dollar-cost averaging, which is buying assets at a regular interval for a fixed amount.
4. Spread Risk: Diversify your portfolio by investing in multiple assets like Bonds, gold, and international ETFs
3. Should I pull my money out during a Stock Market Crash?
It is advised not to sell your assets during a stock market crash, as it can lead to significant losses.
4. What are the Indian stock market timings?
The Indian stock market timings are from 9.15 am to 3.30 pm, traders can buy and sell shares during this timeframe without any trouble.
5. Will you be able to predict future Stock Market Crashes?
Nobody can predict stock market crashes in advance because several factors are associated when a market decline. But you should always be prepared to survive market downturns.
6. How do stock market holidays affect the market?
As markets are closed during holidays, trading volumes are low. Only a smaller group of active investors trades on the market, which can lead to increased volatility and have a more prominent effect on stock prices.
7. What are the advantages and disadvantages of a Stock Market Crash?
When a market crashes, it provides investors with both benefits and drawbacks.
Advantages of a market crash are: buying assets at a low price, market correction, reassessment of investment strategies, and long-term investment potential.
Disadvantages of a market crash are loss of wealth, layoffs, impact on businesses, and reduced consumer spending.