A good and prudent investor knows that the market sports surprises that are usually disastrous but can be foreseen with the help of reliable Online Trading Professional Brokers. Thus, a good investor also knows how to look for signals of such events. He or she also knows how severe each event would likely be. Further, he or she also knows how to differentiate such events, because these unpleasant events may appear the same, even if they are actually different. Read HQBroker Online Broker Review to know more about the two major events in the market, which are market crashes and market bubbles.
A market bubble is perhaps the most characteristic of “emotional investing.” This is a phenomenon that demonstrates what may happen if investors let their emotions lead the way.
A bubble occurs when investors raise so much demand on an asset. This causes that asset’s price to soar so high that it surpasses any accurate or rational reflection of its real and actual value. For the stock market, the actual value of a stock is ideally determined by the performance of the underlying company.
Why is it called a market bubble? Imagine soap bubbles that you blow to make bigger. The more you blow, the bigger it gets. And just when you think it will not stop growing, it finally pops and disappears. Suppose that that bubble was your invested money. It means that your investments will disappear in a blink of an eye.
Somehow connected or brought about by a market bubble, a market crash is a steep plummet in the total value of a market.
This phenomenon usually pushes the majority of investors to attempt to flee the market, even if doing so means they will suffer immense losses. This is where panic selling comes into play. These investors resort to such actions with the view to unload their declining stocks onto other investors.
Panic selling fuels the decline of the market. This exacerbates the catastrophe and affects all market participants. It sometimes even spreads the impact to other seemingly unrelated aspects of the global finance. Historically, significant market crashes have been tailed by a market depression.
What about a Market Correction?
Though the definition of a market crash already seems clear, it can also be sometimes confused with a market correction. It is important that you know the distinction between a market crash and a market correction.
If a market crash is a sharp drop in a market’s total value, a market correction, on the other hand, is the market’s way of “correcting” the overly enthusiastic investors’ outlook on the market. Generally, a correction must not exceed a 20 percent loss of value in the market.
However, a number of crashes have been wrongly labeled as corrections at various points in the drop. This includes the staggering crash of 1987, if you have heard of that.
Despite the confusion and overlapping applications, we usually use the word “correction” for a time when an asset or asset class slides over 10 percent but does not cross the 20 percent mark.
The market has different surprises for you. And what better way to arm yourself against them but to know how they happen, right? The most important takeaway is that these events usually arise from the different attitudes, most of the time excessive, that investors have toward the market.