Re: What are the mechanics behind a market crash?
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Sort of just one of those things I've never fully understood. I understand how what you're saying would work for an individual stock, but it just seems like a large collection of companies simultaneously releasing terrible earnings reports isn't likely. If it was over the course of weeks or something a large downward spiral would make sense to me, but in the case of one day large crashes, I'm just not sure I understand what causes everyone to bail out of everything at the same time.
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panic. the prices of those other companies were bouyied by the hope of crazy earnings in the future. one bad earnings report for one company is enough to pop the bubble...it just needs the pin and the earnings report could be that pin.
in general though, market panic ensues when participants feel their holdings are overvalued and sell.
an example happened in late february when there was a rumor that china was going to increase cap gains tax (or some other tax on stock investments or something) and the CSI300 fell 9% ina day. that reverberated around the world and the S&P & Dow both fell by around 4-5% as well as some other equity indices on the view that as goes china's stock market, so goes the rest of the world's. right or wrong, that panic happened and prices fell significantly.
Barron
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