The hero and heroine of the movie called Stock Market are production and income. If their ‘acting’ is up to the mark, the movie is successful. All other events, developments, barometers etc. are like the minor characters. Who is the villain of this movie? This part is played by more than one! These villains arrive in different shots and shifts and the ultimate purpose of all the villains is one and the same. To damage the goodwill of the company and push its stock prices down. When such a rapid fall occurs in a large number of companies listed on the stock exchange, the entire stock market becomes restless. Some of the companies that are doing well also take the indirect blows and their shares also tumble. The important indexes representing the stock trade, like the Dow Jones Industrial index, show the sudden decline and by now the investors realize that stock market crash is round the corner, why it already taken over the market.
Accurate prediction about the reasons for the crash is impossibility. Some wise ones have the premonitions but even they are unsure. This crash beats all analysis. Once the event takes place the researchers and experts do overtime to find out the reasons. The important economic factors are inflation, reduction in the buying capacity of the consumers, consumer confidence etc The liveliness of the market depends upon the spending power of the consumers and their willingness to buy. When the gear of the market is impeded due to steep rise in the cost of important products, gasoline, heath care and the like, economic activity slows down, recession ensues and an evil chain reaction happens. Companies reduce expenses, economy measures are initiated, welfare projects are curtailed, recruitment stopped, surplus employees have face layoffs. Company profits suffer, and investors rethink about alternative sources of investment other than stocks.
Psychology of the investors
You know the wise saying, ‘Consumer is the King.’ For the present let us change it to ‘Investor is the King’ and his psychology is the ‘Queen.’ The investor goes by the advice of the queen and with the panic reaction amongst the investors, selling spree begins. Psychological factors are responsible to worsen the crash scenario. Consumer confidence is shaken and the markets suffer. Inventories pile up and the marketing manager is at his wits end, as to how to save the situation. Excessive selling of the stocks triggers the stock market collapse. This is a situation to which no analyst, no economist has an immediate remedy.
Guarding against risks
One factor that constantly engages the attention of the prudent investors is to guard against risks. In the stock market a narrow wall divides the area between safety and risk. The normal trends, the ups and downs do not worry the investor. He sees them as opportunities to book profits and remains optimistic. In a crash situation the position reverses, and the investor remembers the word risk, more than anything. He is not willing to take chances now; absolute loss in one particular company shares has the potency to wipe out the entire profits of the portfolio, often a big chunk of the capital. The pessimistic investor begins the withdrawing spree and steps aside from the market. Other investors are in panic and they also join the crowd of sellers. The prices crash day after day and no one knows to the levels to which they will reach.
It is not uncommon in the market that a group of investors join together to form a ‘syndicate’ and go on buying certain shares. This leads to speculation and the price of the share shoots up beyond the actual value of the stock. Many ‘follow the leader’ type investors also join the chorus of buying and this further pushes up the prices. When the investors begin to pull back and start selling, it adversely affects the market and paves way for a market crash. In certain cases, the investors may go for alternative mode of investing in gold, real estate, when they conclude that area to be more lucrative than the stocks. Sometimes, a single factor like a major terrorist attack or drastic changes in the government policy may trigger the crash.
When the growth rate declines and further decline in the wake of changed policies of the government or due to any other reason is foreseen, investors begin to sell the stocks. This excessive selling due to lack of confidence in the economy invites a stock market collapse.