A global market crash happens when a global event causes stock markets to plummet for a prolonged period of time. This event could be the result of a series of factors such as geopolitical tensions, oil price spikes or economic data that sends investors fleeing the market in fear. This type of panic can lead to a sudden drop in share prices, which then triggers more sell orders and a vicious cycle.
Many market crashes can be attributed to excessive speculation. For example, the tech stock crash of 2000 might have been due to investors over-investing in dot-com companies, while the 2008 crisis may be tied to mortgage-backed securities and investor speculation in real estate. Other reasons for market collapses include political uncertainty, recessions and changes to financial regulations.
In the wake of the GFC, governments increased spending to stimulate demand and support employment across economies; guaranteed deposits and bank bonds to strengthen confidence in financial firms; and purchased ownership stakes in some banks and other financial institutions (known as quantitative easing). These policy responses helped to avoid a global depression but left millions of people losing their jobs and wealth. Consequently, it took a long time for many countries to recover from the GFC and return to pre-crisis growth.
Market volatility is inevitable, but there are ways to prepare for the next market downturn. First and foremost, own a well-diversified portfolio that fits your time horizon and risk tolerance. Then you can stay invested through a downturn and reap the rewards of staying in the market over the long term.