Stock market crash
Everything that goes up comes down. So is the story with the share market. Boom and bust are two things that appear with great regularity in share markets. Bull phases in share markets are often followed by a stock market crash.
In bull phases share market records a great gain. Instances of huge gains and rags-to-riches stories attract even laymen to invest in the share market. . Stocks turn over priced. Often we hear a number of stories on how share prices doubled in a couple of weeks and investors made handsome profits. Newspapers begin to reports stock market gains in the front page. Every one starts talking about a great rally in the making. Free advice floats around on the great profits that can be made in every other scrip. Beware of this phase. Such euphoria spells an impending stock market crash.
Over priced stocks is the first indicator of an impending stock market crash. If stocks prices are irrationally high, the earning potential goes down. Investors who purchase the shares in the initial phase of the rally start-booking profits. Slowly the bull market flattens. This is the second indicator of an impending stock market crash. If you act on such indicators, you could save your profits.
A flattened stock market gives way to small losses. Small losses are known as corrections. At the end of a correction phase the relative valuations of stocks appears to be attractive. Speculators and bulls take charge of the market once again. A small rally gains momentum, this is known as the relief rally. Frequent correction followed by small rally is a precursor of an impending stock market crash. If successive relief rally fails to break the upper resistance level, the message is loud and clear -" Sell the shares and book your profits. Another crash is around the corner." Rational investors should protect their profits at this level.
As relief rallies become less frequent, a bear market set in. As bears strengthen their grip on the market, more and more investors run for cover and exit the market. Such mass exodus of inventors often pushes the share market index into ridiculously low levels. Suddenly you find no buyers for the scrip, no matter how low the valuations are. This situation is known as stock market crash.
Stork market crash on October 19,1987 is the greatest share market crash in United States. Many feared that it could be a precursor to the great depression that followed the stock market crash of 1929. Fortunately it was not so prolonged. Markets recovered in the early 1990s. Technological excellence was the new mantra of the decade. Small start up firms like Amazon began to command more market capitalization than U.S. Steel. Price of these shares skyrocketed as rumors on their potential earnings floated around. The pinnacle came in January, 11, 2000 when American Online, a favorite darling of dot com investors acquired Time Warner company- the largest media company in the United States. On January 10 2000, the technology heavy Nasdaq index peaked a high of 5048.62. But adverse verdict in US Vs Micro Soft case and the slow down of technological spend post Y2K took the wind out of the Bull Run. Thus the First crash of this century happened in 2001. Here too, it was the overoptimistic small time investors that crowded the stock exchange in the late 2000 who lost the most.
So be wary of stamping bulls next time. Bears are not too far. Never let greed take the better off you. Keep a cool head and book your profits when valuation seems to be irrational. This is the best way in which you can protect your profits in share markets. No one can buy the shares at its lowest and sell it at the highest rate. Booking your profits when the days are still rosy is the best way to protect your investments from yet another stock market crash.
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