When the Stock Market is Crashing Around You, Do You Hold Steady?

Although Jim Cramer of the Today Show once told investors to sell everything and get out of the stock market, the reality is that those who have enough assets-as well as the fortitude-might be better served by riding out the inevitable ups and downs of the ever-fickle market. Other analysts believe that it is highly likely the stock market will dip even lower in the next year or so, and that should you have money in the market that you will need in the next few years you should probably pull it out now.

They don't, however, recommend panicking and selling all your stock simply because our economy and markets are currently collapsing one another. It appears that after more than a decade of stocks being critically overvalued, they are now settling into something approaching fair value. Emotional selling, based on market conditions, is rarely a good investment strategy, so unless you are in danger of losing your home or going hungry, if you have investments, the wisest course is probably to hold on and ride it out.

What are the Ramifications of a Stock Market Crash?

During times of plenty, the market peaks and investors are buying stocks right and left-and making substantial profits. This type of market is known as a bull market. Unfortunately, strong economic times are almost always followed by shaky economics. At times in our history stock market crashes have occurred due to a specific economic or political situation. The Enron scandal of 2002 took a huge bite out of investor confidence, causing a large market downturn. Much more often, market crashes are caused simply by panic, nothing more. When the value of a stock drops across the board, investors begin to panic and people hurry to sell their stocks lest they lose money. Because of the increased amount of people who are attempting to sell their stocks, the value of those stocks falls even further, creating a vicious cycle.

Who Gets Hurt in a Stock Market Crash?

The shareholders who own stocks are, of course, the ones who are most involved, and the ones who potentially get hurt the worst when the market takes a downturn. Investors themselves are usually the ones who contribute to a stock market crash by borrowing money to buy their stocks, or investing without a good understanding of the market. The investors who are not well-educated in the ins and outs of the stock market are generally the first to panic and rush to sell their stocks, leading to a temporary downturn, or in some cases, an actual stock market crash.

Of course all of us who buy stocks do so because of the hope they will increase in profit, but if we sell the moment it looks as if we might lose a bit of money, stock prices could plummet. The companies who sell stock will sometimes cut back on spending when they see their stock values dropping, which in turn can lead to job cuts which then affect our overall economy. Almost everyone is affected when the stock market crashes because of the resulting job loss, slow economic growth, battered consumer confidence, companies closing and consumers purchasing less.

Can We See a Crash Coming?

Because market crashes typically follow a bull market, people can easily panic when they see what looks like a recession coming. In truth, there are plenty of warnings and alerts in the stock market which predict the end of a strong market. The stock market is a game which is largely dependent upon the human emotions driving it; the best stock investor is one who is aware, skeptical and realistic, and never invests money that would be devastating to their financial future should it be lost.