## What Is a Stock Market Crash?

A stock market [crash](https://www.investopedia.com/terms/c/crash.asp) is a rapid and often unexpected drop in stock prices due to major events, economic crises, or collapsing [speculative bubbles](https://www.investopedia.com/terms/s/speculativebubble.asp). Public panic contributes to further falling prices, leading to significant economic impacts.

Famous [stock market crashes](https://www.investopedia.com/timeline-of-stock-market-crashes-5217820) include the 1929 Great Depression, [Black Monday](https://www.investopedia.com/terms/b/blackmonday.asp) in 1987, the 2001 [dotcom bubble](https://www.investopedia.com/terms/d/dotcom-bubble.asp) burst, the 2008 financial crisis, and the 2020 COVID-19 pandemic.

### Key Takeaways

*   A stock market crash is characterized by a rapid, unexpected drop in stock prices and can result in a prolonged bear market or economic crisis.  
    
*   Fear and herd behavior among investors often exacerbate market crashes through panic selling.  
    
*   Measures like circuit breakers and trading curbs are in place to prevent severe market declines and stabilize stock trading.  
    
*   Historical stock market crashes, such as those in 1929, 1987, and 2008, have had significant economic repercussions.  
    
*   Large financial entities may intervene to stabilize markets by purchasing substantial quantities of stocks during periods of panic.  
      
    

## In-Depth Analysis of Stock Market Crashes

Stock market crashes are typically abrupt double-digit percentage drops in a stock [index](https://www.investopedia.com/terms/i/index.asp) over a few days. Stock market crashes often make a significant impact on the economy. Selling shares during a sudden drop and buying too many stocks on margin are common ways investors [lose money during crashes](https://www.investopedia.com/ask/answers/lose-money-stock-market-crashes/).

Well-known U.S. stock market crashes include the [market crash of 1929](https://www.investopedia.com/terms/s/stock-market-crash-1929.asp), which resulted from economic decline and panic selling and sparked the [Great Depression](https://www.investopedia.com/terms/g/great_depression.asp), and Black Monday (1987), which was also largely caused by investor panic.

Another major crash occurred in 2008 in the housing and real estate market and resulted in what we now refer to as the [Great Recession](https://www.investopedia.com/terms/g/great-recession.asp). [High-frequency trading](https://www.investopedia.com/ask/answers/09/high-frequency-trading.asp) was determined to be a cause of the [flash crash](https://www.investopedia.com/terms/f/flash-crash.asp) that occurred in May 2010 and wiped off trillions of dollars from stock prices.

In March 2020, stock markets around the world declined into bear market territory because of the emergence of a pandemic of the COVID-19 coronavirus.

![Image](https://www.investopedia.com/thmb/HMCFEBHaSf1a-Zyc82DhzyAhT44=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Stock-Market-Crash-July-2021-01-88a96c7bec2846dd9986a5777c089417.jpg)

*— Image by Sabrina Jiang © Investopedia 2021*

## Strategies to Prevent Stock Market Crashes

### How Circuit Breakers Mitigate Stock Market Crashes

Since the crashes of 1929 and 1987, safeguards have been put in place to prevent crashes due to panicked stockholders selling their assets. Such safeguards include [trading curbs](https://www.investopedia.com/terms/t/tradingcurb.asp), or [circuit breakers](https://www.investopedia.com/terms/c/circuitbreaker.asp), which prevent any trade activity whatsoever for a certain period of time following a sharp decline in stock prices, in hopes of stabilizing the market and preventing it from falling further.

For example, the New York Stock Exchange (NYSE) has a set of thresholds in place to guard against crashes. They provide for trading halts in all equities and options markets during a severe market decline as measured by a single-day decline in the S&P 500 Index. According to the NYSE:

*   A market-wide trading halt can be triggered if the S&P 500 Index declines in price as compared to the prior day’s closing price of that index.
*   The triggers have been set by the markets at three circuit breaker thresholds—7% (Level 1), 13% (Level 2), and 20% (Level 3).
*   A market decline that triggers a Level 1 or Level 2 circuit breaker after 9:30 a.m. ET and before 3:25 p.m. ET will halt market-wide trading for 15 minutes, while a similar market decline at or after 3:25 p.m. ET will not halt market-wide trading.
*   A market decline that triggers a Level 3 circuit breaker, at any time during the trading day, will halt market-wide trading for the remainder of the trading day.

> **Important**
>
> Stock market crashes can erase investment values and significantly harm those relying on returns for retirement. While equity price collapses can happen quickly or slowly, crashes often lead to a recession or depression.

### The Role of Plunge Protection Teams in Market Stability

Markets can also be [stabilized by large entities](https://www.investopedia.com/terms/p/plunge-protection-team.asp) purchasing massive quantities of stocks, essentially setting an example for individual traders and curbing panic selling. In one famous example, the Panic of 1907, a 50% drop in stocks in New York set off a financial panic that threatened to bring down the financial system. J. P. Morgan, the famous financier, and investor, convinced New York bankers to step in and use their personal and institutional capital to shore up markets. However, these methods are not always effective and are unproven.

## The Bottom Line

A stock market crash is characterized by its sudden and steep decline in stock prices, often following a catastrophic event or economic crisis. Historically, events like the 1929 Great Depression, the 1987 Black Monday, and the 2008 financial crisis are notable examples. Preventive measures like circuit breakers and trading curbs have been implemented to curb panic selling and stabilize markets.

However, the fear-driven reactions that accompany crashes can exacerbate economic downturns. Understanding these market dynamics and the historical context can empower investors to make informed decisions during volatile times.

> **Article Sources**
>
> 1.  New York Stock Exchange. "[U.S. Equity Market Resiliency During Times of Extreme Volatility](https://www.nyse.com/network/article/nyse-increases-resiliancy-during-extreme-volatility)."
>     
> 2.  Constitutional Rights Foundation. "[J.P. Morgan, the Panic of 1907, & the Federal Reserve Act](https://www.crf-usa.org/images/pdf/jpmorgan.pdf)."