The rapidity of the decline differentiates it from a stock market correction. Traditionally, panicked sellers caused a crash. An economic event, catastrophe, or crisis triggers the panic. That's why investors don't expect a crash and panic.

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That's when irrational exuberance or greed has driven stock prices to new levels. At that point, the prices are above the real worth of the companies as measured by earnings.

A new development called quantitative trading caused recent crashes. Sophisticated investment and hedge funds with thousands of computers were programmed to sell when certain events occurred. Program trading has grown to the point where it's replaced individual investors, greed, and panic as causes of crashes.

It began on October 24, , now known as Black Thursday. Trading on Friday seemed back to normal. The loss of confidence in Wall Street helped kick off the Great Depression. The Dow didn't regain it pre-crash level until November 23, It was the largest point drop in the history of the NYSE.

That was the day the bailout bill failed in the Senate, prompting widespread panic after the bankruptcy of Lehman Brothers. It didn't regain its pre-crash level until.

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Black Monday , the crash of , occurred on October 19, The Dow dropped It took two years before the market returned to pre-crash levels. Three factors caused it. First traders worried about anti-takeover legislation moving through Congress. Second, foreign investors started selling when the Treasury Secretary announced he might let the dollar's value fall. Third, quantitative trading programs worsened the losses. Aggressive Federal Reserve monetary policy prevented the crash from causing a recession.

The Flash Crash occurred on May 6, , when the Dow plummeted nearly 1, points in just a few minutes. It was a technical malfunction caused by an unexplainable shutdown of quantitative trading programs.

The Dot Com Bubble crashed in March In , stock prices of high-tech and computer companies were driven up by investors who thought all tech companies were guaranteed money makers. They didn't realize that corporate profits were caused by the Y2K scare. Companies bought new computer systems to make sure their software would understand the difference between and Back in those days, only two date fields were needed, not the four required to differentiate the two centuries.

The book Irrational Exuberance became famous because it explained the herd mentality that created the stock tech bubble in The Asia Financial Crisis occurred on October 27, The fall in the stock market helped trigger the Long-term Capital Management Crisis. A stock market crash will make the individual investor sell at rock-bottom prices.

How can you tell when the market is about to crash? There's a feeling of "I've got to get in now, or I'll miss the profits," which leads to panicked buying.

When investors are driven by emotion, not financials, then that emotion can reverse quickly, turning into panicked selling. That's the symptom of a stock market crash.

Rebalance it as market conditions change. During a crash, stocks will make up less of your portfolio, while bonds and commodities will make up more. Sell some of the bonds and commodities to buy more stocks, now that the prices are down. When they go up again -- and they always do -- you will profit from the upswing in stock prices.

You've sold some of your bonds and commodities, so you won't lose as much when those prices fall during the bull market. Even the most sophisticated investor finds it difficult to recognize a stock market crash until it is too late.

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Updated September 08, Causes Traditionally, panicked sellers caused a crash. Get Daily Money Tips to Your Inbox Email Address Sign Up. There was an error.

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