For the past century, stock market have been the foundation of our economy advancement and source of financial support for many of the well known companies today.

Coca Cola for instance, started in year 1923 have build it’s brand from a 25 Million dollar company into today’s 234.63 Billion dollar company.

The stock market have made it possible.

And investors whom have invested in such companies have made millions and become rich beyond their imagination.

Will the stock market always go up?

The stock market will not grow “forever”. Stock market can go up over time due to inflation, retained earnings, increase in productivity. The stock market is a positive-sum game, since it is mainly driven by the profits earned by the companies.

But…

“What goes up, must come down.”

Throughout history, there are many ups and downs in the stock market.

In fact, there were a few times the stock market wipe out more than 10% of the equity in the stock market in just one single day.

This drop cause major panic that cause the market to fall even further by 50%, or more that lasted for months, or even years before the recover of the stock market.

What is the worst stock market crash in history?

The worst stock market crash is in 1929, catalysts of the “Great Depression” and is more commonly known as the “Black Monday” and “Black Tuesday”. The market dive by 25% in just 2 days, and by the mid-November of that year the stock market lost half its value.

Finally, after 3 years in 1932 the market collapse hit rock bottom.

At that time, the Dow Jones Industrial Average is recorded to have lost a staggering 90 percent, and thousands of companies have close down with millions being unemployed in the streets.

Recent Stock Market Crash

  • 1987 – Black Monday, program trading that crash the stock market for more than 20% in just one day
  • 1990 – Recession, fluctuation of oil prices that cause the market drop 18% in 3 months
  • 1997 – Asian financial Crisis, overheat of the stock market
  • 2000  – Dot-com Bubble, the collapse of technology bubble
  • 2008 – Financial Crisis, subprime loans and credit default swaps
  • 2020 – Worldwide Recession, The S&P 500 index dropped 34%, from February 19 to March 23 due to pandemic.
Budgeting Plan Development

Signs of Stock Market Crash

There are always warning Signs before most market crash.

If you are able to identify them and prepare for the worst, you might actually survive the market crash, or even profit from it. 

Can you see the stock market crash patterns?

Here are the Top Warning Signs that may signal a Market Crash is just around the corner!

1. Rapid Rise

Is it safe to assume you will earn from the stock if the price of the stock keep rising?

Does it means you should buy it right now and not lose out from its potential gain?

Well… not exactly.

Some traders buy using the rising trend and buy the stock during the rise. They uses complex technical analysis to ‘predict’ the future. Some succeed but many don’t.

As a Retail investor, when the news of the stock finally reaches you, the price of the stock have already factored in the value of the company.

And what you are seeing now, is either overvalued, or in a premium price.

This is exceptionally true when the stock price rapidly raise in just a few days.

A rapid rise in the price of the stock, or financial asset can be a warning sign of a sharp down turn in the near future.

We have seen numerous stock market bubbles including; the real estate bubble and the tech bubble formed after the rapid increase of prices of the stock.

The problem with bubbles is that they give rise to panic-selling.

And this ultimately lead to a market crash with prolong period of recession and unemployment.

Warning Signs of Stock Market Crash

Key Takeaway:

Fear of losing out and greed are the downfall of many retail investors. Those who succeed never let their greed affect their actions. The legendary investor Warren Buffett say it best:

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

2. MARGIN DEBT

Humans are greedy, do you agree?

When investors want to invest more money than what they had in their bank, what they do?

Yup, they borrow.

These investors who wants to make more money in a short time, thus they borrow to invest.

Often, these are the short term investor who see a huge raise in the stock market and don’t want to miss the boat.

The lucky ones may succeed, while many don’t.

When you see many investor take on a high degree of margin debt. This is a huge red flag!

“A market place filled with greed, the high levels of margin debt often ends with stock market crashes.”

By A.C.

Be it the US stock market, or the Chinese equities, the problem with margin debt is fear.

As the big boys sells, the markets start to sink and everyone panics trying to exit, which crash the market even more.

Warning Signs of Stock Market Crash - Margin Debt

Key Takeaway:

Charlie the Vice President of Berkshire Hathaway and good friend of Warren Buffett the Oracle of Omaha says there is only three ways a smart person can go broke during the cnbc interview:

“Liquor, Ladies and Leverage,”

3. IPO

Initial public offering (IPO) or stock market launch is a type of public offering in the stock exchange where shares of a company are sold to institutional investors and retail investors.

An IPO helps medium and big business to get their financial muscle to grow their company.

With the help of millions of shareholders, whom share the vision of the future of the company. An IPO will move the company into the next level of growth.

IPO is all nice and rosy until then time when ‘every Tom, Dick and Harry’ start to apply and get approved for their IPO.

One good example is during the Dot Com Bubble (Tech Bubble) where hundreds of technology companies are listed for IPO.

Companies with no solid balance sheet, or income statement are approved for their IPO listing.

Finally in the year 2000, the bubble busted and the market crashed.

The Dot Com Bubble have brought down together millions of investors and closing hundreds of technology companies.

A surge in the number of IPOs in any given cycle may indicate a bubble.

A clear warning signal that the stock market is going down, it is when the investors are at the most optimistic.

Warning Signs of Stock Market Crash - Margin Debt

Key Takeaway:

More IPO occurs when the market is the most optimistic, a time where IPO companies can get the most from the market.

“Greed.”

4. Mergers & Acquisition

Companies grow usually by 2 ways:

  1. Slow: Customers acquisition
  2. Fast: Mergers and acquisitions of companies

With the access of cheap debt at a close to zero interest rate. Companies often choose to expand their business by the means of mergers and acquisitions of their competitors.

This is a concern when companies start buying up unrelated companies.

Companies often swallow up too much, too soon. They used up massive amount of cash from their cash reserve. This will create a dangerous situation for the company.

‘Time’ is required for a company to generate revenue and gain cash flow.

But by depleting their cash reserved, companies are vulnerable. Companies can fail and end up in bankruptcy from fail mergers and acquisitions.

Increase of debt interest rate may also cause the company to fail.

As the company is unable to meet its debt obligations due to the lack in cash flow, these companies are forced to close down.

Warning Signs of Stock Market Crash - Merger and Acquisition

Key Takeaway:

Mergers and acquisitions of unrelated companies are often a signal of greed and increase risk in the stock market. Warren Buffett say it best:

“Risk comes from not knowing what you’re doing.”

5. Issue Debt

When major multinational companies like ‘FANG’ Facebook, Apple, Netflix or Google and other corporations issue debts for major stock buybacks. This can be a potential trigger of a stock market crash.

A stock buyback scheme is great for shareholder, but when debt is required to be issue to perform a major stock buyback, things can get nasty.

All debt are borrow money, and they comes with a certain amount of interest. Debt have to be paid back to those it loan from. 

A major share buyback scheme with the cash from debt can be a dangerous game. And this is a possible sign of the next crash.

It reduces the company’s cash reserve and its ability to tackle any adversity that the company may meet in the future.

If the company’s cash-flow is affected, it can affect its operations and eventually its revenue. This will bring the company into a very dangerous territory of not meeting its debt obligation.

The collapse of one such company will be the trigger of a market crash.

Though not through the reasons of issue debts for major stock buybacks, the fall of Lehmand Brothers is the perfect examples that trigger the financial crisis of 2007 to 2008.

Warning Signs of Stock Market Crash - Issue Debt

Key Takeaway:

Debt can be good, but it can also be a double edge sword that will wound you in the process. Andrew Ross Sorkin the author of ‘Too Big to Fail’ say it best:

“Debt, we’ve learned, is the match that lights the fire of every crisis. Every crisis has its own set of villains but all require one similar ingredient to create a true crisis: too much leverage.”

Too Big To Fail

Check Price

how to tell if a market crash is coming?

Fear and Greed are the cause of most market crash. These are the nature of human.

In the stock market,

  • Greed drive the market price to rise to an unsustainable level.
  • Fear drive the market down to an unimaginable level.

We as investors knows that investing comes with risk and reward. It is up to us to balance of the risk that we may ripe our reward.

Here we are able to learn some of the most important warning signals that the stock market show us before the market crash happens.

Warning Signs of Stock Market Crash

  1. Rapid Rise
  2. Margin Debt
  3. Increase IPO
  4. Merger and Acquisition
  5. Issue Debt

Signs of Stock Market crash are many, it is up to us to see it and to prepare ourselves from the the stock market crash.

And if you are seeing 2 more more signs of market crash. I will advice to be very careful at what you are investing, and probably rebalance your portfolio if required.

Question: “Is the Market showing the signs of a stock market crash right now?”

“Risk comes from not knowing what you’re doing.”

Wisdom from Billionaire Warren Buffett:

Success is not made overnight, but through determination and the conviction to keep learning and getting better.

Remember the difference between success and failure is what you know, and what actions you take.

Here are some resources what will help in guiding you to your success.

What guides me in my journey to financial freedom are some of the many books I read for the past years.

“Invest in yourself is the best investment you can make.”

Smarter Today Library

Want to Support Us?

Share with your friends on Facebook or Twitter if this help them too.

This will motivate us to write even more amazing articles to help you in building wealth in the future!

Check out our other Book Reviews Here.

If you like our post, feel free to subscribe.

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Disclaimer: We are not your financial adviser or lawyer, information found in our website are our opinions and should be used for entertainment purpose only. You should always ask your financial adviser or lawyer for any financial or law related advice.

What are your thoughts?

%d bloggers like this: