A global market crash is a severe stock market downturn that can have long-term economic effects. It can be caused by sudden shocks such as a financial crisis, oil embargo, or global pandemic. These events usually trigger panic, overvaluation and a sharp drop in investor confidence.
A sudden change in market sentiment can cause the value of assets to plummet and may lead to forced liquidations, which can accelerate the decline. Traders and investors who borrow heavily to invest in markets are particularly vulnerable to this type of risk. This is why it is critical to understand market crashes so you can recognise them and avoid making bad investments.
The Great South Sea Bubble of 1720
When the Great South Sea Company shares were first floated in London in 1691, they seemed like a great deal. Shares were priced at as much as 10 times the average annual wage of a skilled worker, and it was thought that this was an incredible opportunity to make money. However, when the company’s business model didn’t deliver, the price of shares collapsed, destroying many people’s wealth.
This is one of the most significant stock market crashes in history, as it was the catalyst for a worldwide recession. A major factor in this was the instability of the financial system, triggered by the housing market where lenders were issuing arguably too many mortgages to unqualified buyers. As these mortgages began to default, it caused liquidity to dry up, causing the markets to collapse.
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