A market crash is a sudden and severe decline in asset prices across financial markets—stocks, currencies, commodities, and more. The initial drop typically triggers panic selling, which accelerates the decline further.
How a market crash differs from other downturns
A bear market is a gradual decline unfolding over months or years; a correction is a smaller pullback that's normal in healthy markets; a flash crash is an extremely rapid drop followed by quick recovery, often from technical errors. During a crash, a broad range of assets fall sharply at the same time.
What triggers a market crash
Crashes are driven by combinations of factors: economic weakness, geopolitical shocks, or sudden shifts in investor sentiment. The speed and depth vary—some crashes unfold over days, others over weeks. No crash follows a fixed pattern.
Practical implications for traders
Market crashes present two immediate challenges: execution and psychology. As prices fall rapidly, liquidity can dry up, making it hard to exit trades at expected prices. The emotional pressure to sell at any price during panic often leads to losses larger than necessary.
A diversified portfolio—holding assets that don't move together—helps reduce crash damage. Traders without diversification can face substantial losses when a crash hits.
