The Indian stock market has seen its fair share of ups and downs, only too common to any financial market. While bull runs are euphoric for investors, crashes bring despair. Yet, every crash teaches a significant lesson to investors, policymakers, and the financial system.
Setting aside all this, in this blog, we will chronicle the lessons furnished by some of the greatest stock market crashes in the Indian stock market has ever known along with the lessons we can get from them.
The 1992 stock market crash goes down in history arguably known as the most infamous crash in the financial history of India. The Harshad Mehta scam was the origin of the crash. Mehta, a stockbroker, manipulated stock prices with illegal means and siphoned money from banks.
The Consequences:
> Sensex reached great heights at about 4,500 points and came crashing down.
> Death of thousands of retail investors who invested all their lifetime savings into the stock market.
> The scam has made the government pass stricter regulations regarding the financial and securities market laws and the establishment of the SEBI as an effective regulator.
The Lessons:
> Avoid Speculative Trading: Invest in hype without doing any analysis to counter. Not recommended.
> Regulatory Oversight Is Essential: Rigorous and competent regulations imply deterrence against fraud within the financial sector.
> Diversification Is Important: Investors who lost heavily due to only being invested in stocks that were manipulated by Mehta.
In Ketan Parekh's case, The main technique used by him for the manipulation of stock prices was circular trading. This manipulation created inherent instability, eventually triggering the bombshell of the market.
The Consequences:
> The Sensex dropped 176 points on a single day.
> Many companies went bankrupt due to overvaluation and speculation.
> Regulatory norms regarding trading were consequently made stricter from the viewpoint of market safeguarding.
The Lessons:
> Be Aware Of Market Bubbles: When shares rise without justification, a crash will follow.
> Due Diligence: Investors must analyze company fundamentals rather than follow market trends blindly.
> Be wary of market manipulators. Steer clear of those that seem to get appreciated mechanically without any reasonable business-related rationale.
The 2008 crash initiated on account of the global financial crisis, which was kicked off by the paradoxical failure of Lehman Brothers in the US, had its Indian domain with further shockwaves as the FIIs withdrew hefty sums from the Indian markets.
The Consequences:
> The major factor impacting the situation was that the Sensex arbitraged from its peak of 21,000 points in January 2008 to almost 8,000 points by the end of the year.
> As liquidity decreased, thus reducing consumer spending, the Indian economy took a downturn.
> Several companies found themselves in utter financial distress, and many investors reported huge losses.
The Lessons:
> Global Events Affect Indian Markets: Investors should track global economic trends.
> Have An Emergency Fund: A financial cushion helps investors withstand crashes.
> Long-term Investment Pays Off: Investors in quality stocks get their money back over time.
One very drastic change occurred in the stock market when to reduce black money, the Indian Government declared the demonetization of ?500 and ?1,000 currency notes in November 2016. Thus began the immediate negatives on the stock market.
The Consequences:
> The Sensex and Nifty observed steep falls due to the sudden squeeze of liquidity in the economy.
> Real estate, banking, and smaller businesses suffered gravely.
> The Indian economy took months to adjust to the new currency regime.
The Lessons:
> Government Policy Will Affect The Market: Massive policy initiatives can create short-term volatility.
> Stay Prepared for Uncertain Events: Investors should maintain cash for dealing with sudden economic disruptions.
> Invest In Fundamentally Strong Companies: Well-managed companies recover faster from policy shocks.
> Stay Prepared For Uncertainty: Investors should maintain liquidity to handle economic disruptions.
The COVID-19 market crash in March 2020 corresponded to lockdowns and appalling economic uncertainty.
The Consequences:
While the index went down from roughly 42,000 points in February 2020 to almost 25,000 points in March 2020, this market saw panicked withdrawals and rallied huge amounts of volatility from investors.
Then, the market quickly rose to new heights in approximately a year.
The Lessons:
> Refuse To Sell In A Panic: Markets recover, often with time.
> SIPs Work: Investors who kept investing in SIPs gained from the recovery.
> Knowledge Is Power: Being aware of economic trends will help investors make informed choices.
In early 2023, a foreign research company accused the Adani Group of financial irregularities, creating extreme volatility in the stock. The price of shares of companies owned by Adani fell with rapid force.
The Consequences:
> Adani Group stocks lost billions in market capitalization within days.
> The overall market experienced fluctuations as investor confidence wavered.
> Regulatory scrutiny increased on corporate governance practices in India.
The Lessons:
> Corporate Governance Matters: Investors should assess management transparency before investing.
> Avoid Overexposure To Single Stocks: Diversification reduces risks from individual stock crashes.
> Market Rumors Can Trigger Volatility: Not all news should be acted upon immediately.
Inevitably, the greatest stock market crashes in the Indian stock market bring important lessons. The intention to arrive at a logical solution to investment matters implies the need to refrain from speculation trades, to facilitate a well-balanced portfolio; and to develop the full understanding of the numerous other modes of investment. It is in patience, discipline, and a longer-term mindset towards one's investment practice that dividends will be realized in wealth built in the stock markets.
When successful long-term investment plans are combined with financial discipline among investors, they are not only poised for survival during stock market crashes but reap huge rewards during recoveries. Whether new or experienced, learning from past market crashes will help you invest much better in the future.
> Here’s the link to the YouTube Channel below created by Ruchir Gupta, India’s Leading Stock Market Mentor and currently the Most Trending Role Model in the Stock Market Industry where he illustrates every topic related to The Stock Market deeply by stating different relatable causes and effects and also coming up with appropriate solutions to the Problems!
Go and watch to avoid problems and learn about the stock market with exact logic and strategies!
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