How does a market ‘crash’?
In: Economics
For investments, the price of an asset goes down when lots of people begin selling it for less than the current price. This creates a negative feedback loop, where falling prices cause them to fall faster.
You walk into McDonald’s and order a burger at the going rate. You see people cutting the line ahead of you and getting their burgers faster. This is because they are offering more than you are. In order to get your purchase completed quickly, you’ll need to offer as much money as they are, if not more.
The price of the burger is going up.
In a selling market, this is flipped. You put your burger up for sale and nobody is buying. You look and see that prices are lower than what you are asking. You mark the price of your burger down. It still doesn’t sell, you mark it down again and again. The price of the burger is going down.
You’re trying to get rid of this depreciating asset, and so is everyone else, causing the price to crash.
This can happen for a single stock, the entire stock market, housing, cars, etc. The cause can be a multitude of factors (glut of supply, potential regulation, corporate bankruptcies), or a single overwhelming factor (Covid). It results in a bunch of people trying to get to the emergency exit before you and dump their assets before the prices fall further.
Latest Answers