Business Desk – Stock Market Crash History: A fall in the stock market is not an unusual phenomenon. In a normal fall, the market may recover after falling a few percent, but when the selling becomes so intense that a large part of the market starts losing its value in a short period of time.
If investor confidence is lost and selling increases due to fear, it is generally called a market crash. Generally, if the market falls by about 20% from its highest level, it is considered as a major decline or crash.
The Indian stock market has also seen many such big ups and downs. The Harshad Mehta scandal of 1992, the global financial crisis of 2008 and the Covid crash of 2020 are big examples of this. The reasons for all three were different, but the market behavior remained largely the same—first bullishness and confidence, then a big shock and then a sharp selloff in panic.
1992: Market confidence broken due to Harshad Mehta scandal
The 1992 crisis is one of the biggest events in the Indian financial market. At its center was stock trader Harshad Mehta. At that time there were many flaws in the system of transactions between banking and stock market. Using these, large amounts of money were invested in the stock market and the prices of some shares increased rapidly.
In January 1992, the Sensex was at around 2,300, which increased to 4,467 in April. But in April, irregularities related to banking transactions started coming to light. Investors lost confidence and heavy selling began. On April 28, 1992, the Sensex fell by about 12.77%.
Following this crisis, major changes took place in the direction of strengthening market surveillance and regulation. The lesson for investors was that a company cannot be considered strong just by looking at the rising share price. It is important to look at his earnings and business also.
2008: America's crisis reached India
The 2008 crisis was related to the global financial system. The housing and subprime loan crises in America weakened financial institutions. In January 2008, the Sensex reached a record level of 20,873.
After this the crisis increased. Concerns increased about American financial institutions Fannie Mae and Freddie Mac in July, and the situation worsened with the bankruptcy of Lehman Brothers in September. Selling intensified in the Indian market also.
According to RBI, by March 9, 2009, the Sensex had fallen by about 60.9% from the peak of January 2008. This made investors understand that the Indian market is not isolated from the global economy and the impact of foreign investment.
2020: Corona suddenly shook the market
The crisis of 2020 was different from the first two. This time the epidemic affected economic activities around the world. Due to the lockdown, businesses were closed and uncertainty regarding the earnings of companies increased.
On March 23, 2020, the Sensex fell by about 13.2%. By the March low, the Sensex had fallen nearly 39% from the January high. But after this, the market made a rapid comeback due to economic support from governments and central banks, hope of vaccine and commencement of activities. By September 2021, the Sensex reached above 60,000.
Market behavior was similar in all three crashes
The financial system breakdown in 1992, the global banking crisis in 2008 and the pandemic in 2020—all three had different reasons. But every time there was a rise first, then some big shock broke the confidence and after that fear increased the selling.
One investor sells after seeing the decline, another reduces the risk and institutional investors can also reduce their stake. If there is more investment in the market through leverage i.e. borrowed money, then the decline can be sharper.
What signs to look for before a crash?
Excessively inflated prices, extremely high valuations compared to companies' earnings, high debt and large swings in interest rates can increase risks to the market. As interest rates rise, loans become expensive and investors start getting better returns in safer options.
Therefore, there is no sure way to avoid a big fall in the market, but the investor can definitely reduce the risk by understanding the company's earnings, valuation, debt, interest rates and global conditions.
