Stock market declines and even crashes are the result of more investors offering stocks for sale than offering to buy stocks. Investor sell stocks because they believe that their price will decline or their returns will decline, i.e. dividends will be lower because of decreasing profits, increasing interest rates or depreciating corporate assets.
Since 1948, there have been 10 major market declines in the USA stock markets. The largest drop before October 1987, from December 1972 to September 1974, was by 46%. Declines have averaged 23% and have been gradual; it has taken stock prices an average of 14 months to hit bottom from their peaks. About one half of these declines were followed by recessions in the economy; generally economist believe that stock market declines are not the cause of recessions. After reaching a high of 2722 in August 1987 the market crashed by over a third from that peak.
Stock market crashes affect even those who do not have direct investments in stocks. Many people who do not own shares have an indirect stake in stock exchanges through their investments in pensions funds and insurance companies. If they don not invest, the companies work for probably do, which means there is less money around to pay for wage increases or jobs.
A financial crash on the stock markets temporarily dislocates economic activity, disastrously effects those whose incomes and wealth are based on financial assets, reverse government policies aimed at selling assets to finance current spending, frighten away small or nervous investors in markets, and dramatically demonstrate the risk in market investments including private pension schemes.
In the months and years before the great crashes or 1929 and 1987 a large number of people and institutions were in the market only because it was going up, and they aimed to get out before it went down. The overwhelming factor was greed, which turned suddenly into fear.