How does a market ‘crash’?
In: Economics
Let’s say the market is made up of Beanie Babies, Silly Bands, and Pogs. You and your friends in school all like these things. The kids in next grade down like them too, so their value continues to increase. Maybe you can trade a Pog for a candy bar. Eventually, the fad wears off and Pogs are not as cool. You’d have to trade 4 Pogs for a candy bar.
What would happen if Beanie Babies, Silly Bands, and Pogs ALL became uncool at the same time? Their prices would drop because your friend is willing to give 8 Pogs and a Beanie Baby for a single candy bar and when folks see that the price is dropping, they rush to get rid of their own stuff causing the spiral to continue.
That’s kind of what happens in a market crash. People don’t expect the stock to be as valuable in the future as it is right now and want to get rid of it (or have to get rid of it), possibly at a loss.
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