How Does a Stock Market Crash?

Have you ever wondered “how does a stock market cash” or “is it possible to take advantage of a stock market crash”?

Did you know that it is easier to make money during a stock market crash than it is during a raging bull market – Why? Because stock investing is driven by two emotions

FEAR & GREED

If you look at the stock market history & old stock market graphs you will notice that the stock market index falls much faster than it rises. There is an old saying that “the bulls need to walk up the stairs but the bears jump out the window”. So once again let’s look at the question how does a stock market crash.

The main reason behind a stock market crash is Fear. Whether it was the stock market crash of 1929, the great depression or the current credit crisis that we are going through, whether it is in the USA, Australia or Iceland the main reason behind the crash is fear.

When investing in shares or getting stock market advice people often forget to think about all of the other investors who are doing the exact same thing. Plus the majority of money invested into the market doesn’t come from mum and dad investors but huge corporations and fund managers.

Whenever you buy shares you are buying them at a time when other investors have done two things

1.They have already bought the shares and are sitting on a profit or a loss.
2.They have already sold the shares with a profit and a loss and are looking at the right time to buy them again.

Taking this into account, let’s pretend that you buy share at $20. 6 months ago this share was trading at $14 and it has slowly climbed to $20 and you are hoping that it will continue to rise. You know own the share just like the all the investors who had already bought it but there is one big difference – Theses other investors are all sitting on profit. So they are now watching the stock price like a hawk because the last thing they want is a stock market crash to come along and wipe out their profit. To make things even worse most investors aren’t only thinking about the profit but they have already spent the profit in their heads. So when the share price starts to turn around you think “it’s ok, I’m sure it will come good” – whereas they are thinking “oh no I don’t want to lose my profit (new car) I better sell. This fear of losing profit starts to grow and more and more people start jump off the bandwagon – Apart from you who has bought at the top, your still saying “I think it’s going to turn around”.

So how does a stock market crash? Of course there are many contributing factors but fear is most definitely the biggest. Unfortunately for most investors they end up losing money because they typically buy when the market is high and sell when the market is low.

So how can you not fall into that trap? Simply by knowledge, education and experience. No one will be able to time the market perfectly (buy at the low and sell at the peak), not even Warren Buffet does that. But if you can buy during the bottom 30% of the market and sell during the top 30% you will go along way to becoming a successful investor.

What about making money when the market is crashing? I said before that you can actually make money during this period and that is true. Why? Because fear is much easier to predict than greed therefore the market moves quicker. So if you know a few very simple strategies you will actually be able to make huge profits in a quarter of the time.

So maybe the question you should be asking yourself is not how does the stock market crash but how can I take advantage of a stock market crash?