Stock market crashes are an unfortunate fact of life on Wall Street, with eight major market crashes in the past 100 years, led by the stock market crash of 1929. That stock market crash triggered the Great Depression -- often cited as the worst economic period in U.S. history.
Stock market crashes occur after significant and rapid declines in the stock market over a short period of time -- even in one day, in some cases. Any one-day market decline of 10% or more in a single day is generally described as a market crash.
A steep market decline on a key index, like the Dow Jones Industrial Average or the Standard & Poor's 500, is usually followed by panic selling by investors, sending the stock market into a deeper spiral.
When legions of investors try to sell, that causes further panic in the markets, and can lead to investment companies issuing "margin calls" -- calling in money lent to investors so they can buy stocks and funds -- which forces those investors to sell at current (usually low) prices to get their cash reserves to satisfactory levels to meet those demands. Over the decades, many investors have gone bust over stock market crashes --when supply trumps demand and there are more sellers than buyers.
The numbers following a major market crash are indicative of the seriousness surrounding crash. After the stock market crash of 1929, for example, the U.S. stock market lost 83% of its value over the next three years, pushing many millionaires to join soup lines.
What Happens When the Stock Market Crashes?
Stock market crashes lead to highly negative outcomes for investors, with the following potential consequences:
A market collapse can wipe out what economists call "paper wealth." Paper wealth is money tied up in investments like the stock market or the real estate market that could be sold for a gain, but hasn't yet. In contrast, "real wealth" refers to actual, physical assets, like the money in your bank account, or a vehicle you own that is fully paid off and can be sold for a definite financial gain.
Market collapses can really hurt older investors. A stock market collapse can inflict damage across the board, demographically, but the impact on older Americans is especially onerous. Think of a 67-year-old retiree whose assets are largely tied up in the stock market: The value of those assets plummets after a market crash. While a 25-year-old has plenty of time to rebuild portfolio assets, a 67-year-old does not, and doesn't have the needed income any longer to even play "catch up" in the stock market.
Unemployment jumps after a market crash. Companies invest in the stock market, too -- often heavily. When the market crashes, companies invariably suffer a significant loss to the bottom line, and begin cutting costs and laying off employees to stave off financial disaster. That has a direct impact on the nation's employment figures.
Banks go bust. Banks and credit unions, the largest lenders in the U.S., often can't recoup their loans after a prolonged market crash and a resulting recession and depression. Many banks, especially smaller ones with higher loan risk, often go belly up after a stock market crash.
The real estate market turns downward. Homeowners and commercial property owners often suffer severe financial loss after a stock market crash (like the loss of a job or significantly reduced demand for housing.) That scenario picks up steam and causes demand for new homes and apartments to fall, even as property owners may suddenly be unable to afford their loan payments, leading to property foreclosures and personal bankruptcies.