A global market crash is a rare event, but it is important to keep in mind that it can happen at any time. It usually starts with a catalyst like disappointing economic data, a major bankruptcy or a global crisis. This triggers a wave of selling and can quickly lead to prices falling precipitously. Traders can also be forced to sell when their stop-loss orders are triggered or when margin calls are made.
The Great Depression began with a stock market crash. This happened after a period of speculative growth and overconfidence. In the Roaring Twenties, many believed that asset prices would continue to rise and were unafraid of taking on debt. When this bubble burst, it led to a decade-long recession.
Market crashes can have far-reaching effects that impact everything from consumer confidence to global liquidity and financial stability. They can also change how investors view risk and shift investment strategies. In most cases, a market downturn can be followed by a recovery.
To protect yourself from market volatility, it is wise to invest in a diversified portfolio that is appropriate for your time horizon and risk tolerance. It is also helpful to have a mix of blue-chip stocks, defensive stocks, bonds, high-yielding dividend stocks and exchange-traded funds (ETFs). These assets can help spread risk across multiple sectors. In addition, you can use hedging strategies to protect your portfolio from the effects of volatile markets. For example, pairs trading allows you to open long positions in two assets that act as a hedge against each other.
