Why investors get swayed by their emotions when the stock market falls

The decline in the Sensex is only a correction, not a crash.

ET Wealth explains the distinction and looks at the factors that led to some of the biggest single-day falls in the Sensex.

Here's how investors get swayed by emotions during the financial roller-coaster.


Sensex’s biggest, single-day, absolute falls

What do you call a falling market—crash, bear phase or correction?

Crash (2008-9)

It’s a very sudden and deep drop in a single day or over a few days, across a wide cross-section of the market. This typically happens due to panic selling after an unlikely crisis or catastrophe and usually after an extended bull market. The large-scale selling leads to a sudden decline in market value, resulting in massive losses. A crash can lead to a bear market or recession, wherein the economy is negatively impacted. The 2008-9 period saw the market crash several times.

Bear phase (2015-16)

This is a phase that lasts for more than two months and the drop in major stock indices is at least 20% from recent highs of a couple of months. Since no one can predict how long the pessimism will last, investors can panic and sell, leading to a further drop in stock prices and a fall in the value of indices. Crashes can typically lead to bear markets with poor sentiment governing the markets over an extended period

Correction (2018)

This is a milder fall in a major stock index when it drops by around 10%. It usually happens when the irrational enthusiasm of investors pushes up the market and stocks become overvalued. Correction is a natural way for the market to right itself. It occurs much more frequently than a crash or bear market, and doesn’t last too long, usually less than two months. A good example is Feb-March 2018 fall of around 10%.

How investors behave during rise and fall... and why
Investors exhibit a set pattern of emotions, ranging from disillusionment to panic, during a market cycle. Find out how they are governed by various behavioural biases that make them react the way they do.