Have you heard of a stock market crash before? Probably you know the crash of 2020. What exactly a crash is? Are all downturns crashes?
Is there any degree of crashes? In this article, we are going to study Indian Stock market crashes in recent times and try to cover their causes as well as consequences.
The Stock market is a volatile place and crashes are not very rare here. Generally, there is no strict definition of a Crash, They are defined as a rapid double-digit fall in indices. And when I used the word Indices I exactly meant to it not stocks or commodities, because of the highly volatile nature of stocks comparing to Indices.
Usually, these crashes impact the markets for several years but at the same time, we have to keep in mind that trends keep changing. In this article, we have summarized the Indian Stock Market Crash History.
The year 1982 didn’t witness exactly a crash but something like that. It’s one of the most interesting incidents in the history of the Indian Stock market.
1980s was the time when the Bear cartels were in power and quite popular for operating & crashing the stocks. They use to sell the stocks of a company and then manipulate it to crash and finally, when the stock price had fallen they buy that stock and square off the positions. They operate not only the markets but also stocks of various companies.
We have to note that this was the period when stock markets were very different from nowadays. In the 80s there used to be a 14-day settlement period in which anyone could buy or sell shares.
They were treated like an intraday trade. Hence, Bear cartels short sell and square off within 14 days.
In 1982, the shares of Reliance Industries fell 9% to 121 from 131 in a very short period. Usually, this much drop is not seen in large-cap companies. The drop in the price was due to the manipulation of Manu Manek. Who was the biggest bear at that times.
His cartel shorted around 11 lakh shares of Reliance. Dhirubhai Ambani who was the chairman and director realized that if this selling continues it can cause disasters to the company because small Investors would lose the faith in Reliance. So, he gathered his broker friends and asked them to start buying Reliance shares and they did so.
At the end of the 14 days settlement period, Friends of Ambani asked for the delivery of the shares sold by the bear cartel but since the bear cartel didn’t have those shares their happened a huge problem. And Dhirubhai didn’t let the BSE to open unless settlement of the trade. As a result, BSE remained closed for three consecutive days.
The crash of 1992 is known as “The Harshad Mehta Scam”. In this crash Sensex fell more than 50% within the year.
In 1990s Harshad Mehta was quite popular in the stock market and called “The Big Bull” of Indian stock markets. He used to operate the prices by buying shares of a specific company, pump up prices by increasing demand, and selling them to book profits.
What he used to do was the exact opposite of the bear cartel. ACC Limited is one of the most popular examples, Harshad surged its price from Rs.200 to Rs.9000 (4500%) per share only in 2-3 months.
He used banking funds and loans to operate the markets. When he was operating ACC he had an unregistered loan of SBI and several other banks costing more than 1000 crores.
When this news came out and the scam exposed, the markets experienced one of the most drastic falls. Sensex tanked by around 2,000 points.
In May of 2004, Sensex registered one of its biggest falls of nearly 565 points. The reason was not very clear for this crash but according to analysts, this was the result of the unexpected defeat of the National Democratic Alliance (NDA) causing a meltdown in the emerging sectors of the Indian economy.
But the second reason provided is that UBS which is one of the biggest foreign institutional investors in India sold shares during this period for unknown reasons indirectly causing the crash.
The crash of 2008 is more commonly known as the Burst of the “United States Housing Bubble”. The financial crisis of 2008 adversely impacted businesses, economies, and stock markets all over the world. On January 21, 2008, the Sensex dropped by around 1408 points.
According to analysts, the fall was due to a range of reasons such as:
- Overvalued Tech companies of USA
- A change in the global investor confidence
- The widespread fear that the economy of the USA might go into recession
- A drop in the interest rates in the US
- Volatility in the commodity markets
- Foreign Institutional Investors and Hedge Funds selling shares from emerging markets and investing in stable developed markets
- Huge build-ups in derivatives positions leading to margin calls, etc.
The crash of 2008 impacted the markets longest, by the end of 2008, the Sensex had dropped to 20,000.
You are most likely to be aware of the recent crash and V shape recovery in the global markets. This crash was due to the pandemic of COVID-19 causing lockdowns around all over the world.
The day when the World Health Organization (WHO) declared the virus as a pandemic, the Sensex dropped directly from 42,273 points to 28,288 points within a week. But surprisingly markets recovered in a manner which no one could expect and touched all-time highs the next year.
You can observe the stock markets have experienced frequent crashes for a wide range of reasons, from bear cartels, brokers, wars, and even pandemics. Also, Political instability, government policies, and banking crises also created uncertainties in the stock markets several times.
We should take lesson from the history of the stock market crash & we should concentrate and keep our eyes open for these kinds of events because that can help you to buy on dips. Also, remember while crashes are part of the stock markets recoveries have also been consistent.
Frequently Asked Questions
Q. Will the Indian Stock market Crash in 2021?
Ans. According to the recent reports of analysts, this V-shaped recovery is the first of its kind in the global stock market history and also hard to accept, but since business are aligning their performance with the rise there is hardly any chance of a crash. Also, the Vix index is on multiyear low indicating stability in the market.
With regard to this, Most of the industries such as Insurance, Online Education and E-Commerce, etc are outperforming after the crash. Crude prices are at all-time highs.
Q. Do you lose all your money if the Stock market crashes?
Ans. No, you can’t lose all of your money, because the stock price can ever be zero. Imagining if the company goes bankrupt you still be paid if any amount is left after clearing all Bonds and Debts.
Also, If you have received any dividends from the company that is still your money. You still have some amount.
Q. What happens if the stock price goes to zero?
Ans. A Stock price can never be zero. They still continue to trades on penny prices with low volumes. You can look at some listed bankrupt companies.