What Causes a Stock Market Crash — 7 Immediate Triggers That Sent Global Markets Down

FAQs:What Causes a Stock Market Crash

A normal investor wakes up. His portfolio is down 7% overnight. What happened?

Raj opened his trading app like every morning.
But today was different.

The NASDAQ had fallen almost 5% overnight.
The S&P 500 was down 3.25%.
Global markets were red everywhere.

His midcap mutual fund showed a sudden dip.
Even his long-term SIPs were bleeding.

And he kept asking one thing:

“What causes a stock market crash? Why does everything fall at once?”

That’s what this article explains.

This article answers 5 simple questions:

1. What causes a stock market crash in real life, not textbooks?
2. Why did the 2025 global market crash look similar to the 2020 one?
3. Why did Indian markets stay stable when the world fell?
4. How does a falling Rupee worsen the crash effects?
5. Why are even long-term investors suffering right now?

1️⃣ What causes a stock market crash?

A crash happens when fear spreads faster than facts. Big investors rush to exit, algorithms follow, and selling snowballs.

A crash is rarely about a single headline.
It’s usually a chain reaction.

Here are the core triggers that create a crash:

1. Sudden macro fear

Something big scares the market.
In 2020 it was the virus.
In 2025 it was tariff shocks and policy uncertainty.

Fear makes investors rush to protect capital.

2. Heavy selling by large institutions

Foreign funds control huge volumes.
When they sell, markets fall fast.

3. Algorithmic trading amplifies the fall

Algo systems often trigger more sell-orders once indices drop beyond a threshold.

4. Overvaluation before the crash

When markets rise too quickly, corrections hurt more.

If you want to understand how tech euphoria can lead to dangerous valuations, check out my detailed analysis on “Is There an AI Bubble?” where I explain how hype-driven sectors often become the first ones to collapse during market stress.

5. Liquidity drying up

Once buyers disappear, even good stocks fall sharply.

Here’s a simple example:

Imagine 10 people own a stock worth ₹100.
One big investor sells 30% of their holding.
Others panic. Buyers disappear.
Price falls to ₹87 in minutes.

That’s how real crashes look.

2️⃣ Why did global markets crash so sharply in 2025?

Policy fear. Tariff expectations under Trump triggered sell-offs similar to 2020 pandemic panic.

The video notes highlight the following:

• NASDAQ: −5%
• S&P 500: −3.25%
• Worst fall since April 7, 2020 and April 8, 2025

These were not random numbers.
These were fear-driven responses.

2025 crash triggers:

• Tariff shock fears from policy announcements
• Concerns about global supply-chain disruption
• Risk-off sentiment among institutional investors
• High valuations in tech stocks
• Sudden shift in bond yields
• Weak global macro indicators

Comparison Table: 2020 vs 2025 Crash Triggers

Why it felt sudden

Investors had priced in stability.
A surprise tariff-related headline shook that belief.
When belief breaks, markets fall sharply.

And again, the key phrase remains:
What causes a stock market crash is not the news itself, but how investors react to it.

3️⃣ Why did Indian markets stay in the green while global markets fell?

India had stronger domestic flows and lower foreign exposure that day.

While global indices corrected sharply, Indian markets were relatively stable.
This surprised many beginners.

Reasons India stayed green:

1. Strong domestic buying (DII support)
   Indian retail and mutual fund inflows remained strong.
2. Sector rotation
   Investors moved money from small/midcaps to safer largecaps.
3. Lower immediate exposure to tariff-related risks
   Tariffs hit export-heavy US and Asian markets harder.
4. Local macro stability
   Inflation and domestic demand remained manageable.

But it wasn’t all good news

The market being “green” didn’t mean everything was fine.

• Midcaps were under pressure
• Smallcaps faced selling
• Rupee hit an all-time low
• FIIs were cautious

So India didn’t “escape” the crash.
It simply reacted differently..

To see a real example of how US policy changes ripple into Indian markets, read my article on “How Trump Tariffs Ruling Will Affect the Indian Stock Market” — it shows how trade actions can instantly spark market panic

4️⃣ How did the Indian Rupee hitting an all-time low affect the crash?

A weak Rupee increases import costs, inflation risk, and foreign investor worry — leading to more selling.

Let’s break it down simply.

Why the Rupee fell

• Dollar strengthened
• Outflow of foreign funds
• Higher global uncertainty
• Rising crude oil prices
• Import-heavy Indian economy

How a weak Rupee worsens market fear

1. Imported goods become costlier
   Crude oil → fuels inflation
   Electronics → tech sector margins fall
   Machinery → capex becomes expensive
2. FIIs withdraw more money
   If currency weakens, foreign investors lose value even if stock price stays same.
3. Rupee fall = inflation risk
   Inflation risk = policy tightening
   Policy tightening = market fall

A falling currency acts like “fuel” to a crash.

5️⃣ Why are long-term investors suffering even after staying invested?

Because the correction hit midcaps and smallcaps the hardest, and many were overvalued.

Long-term investing is powerful.
But “long-term” doesn’t mean “no temporary losses.”

Why even long-term investors are in red:

1. Midcaps and smallcaps saw high valuations
   Stocks with PE ratios of 70–90 were common.
2. Global fear triggered broad selling
   When foreign funds sell, everything falls — even fundamentally strong names.
3. Prashant Jain’s warning
   The video mentions veteran investor Prashant Jain.
   He warned that even disciplined, long-term SIP investors faced negative returns recently.

His point was simple:

Long-term investing works.
But not if you buy at peak valuations.

Example:

You invest ₹10,000 monthly into a fund.
If the fund rises too fast and then corrects 15–20%,
your average cost suffers — temporarily.

It doesn’t break the strategy.
But it tests patience.

Market Trend Chart: NASDAQ & S&P 500 (Crash Comparison)

The chart shows that 2025 wasn’t as severe as 2020,
but the speed of the decline created panic.

Crash Impact on Key Markets (2025)

6️⃣ What can investors do during a crash to avoid panic?

Don’t react emotionally. Look at valuations, asset allocation, and risk exposure.

Practical steps:

1. Check your asset allocation

If equity > 70%, reduce risk over time.
Not during panic, but during calmer phases.

2. Avoid selling good stocks

Falling price ≠ bad company.
Focus on earnings, not fear.

3. Increase SIPs during corrections

Corrections create better long-term outcomes.

4. Hold more cash if volatility rises

Cash is a safety belt during extreme fear.

5. Watch global macro signals

Dollar index
US bond yields
Crude oil
Rupee movement
These give early warnings.

7️⃣ Why do crashes look sudden even when warnings exist?

People ignore small warnings until they become big threats.

Key reasons:

• Investors assume rallies will continue
• Risk builds slowly
• News events trigger sudden panic
• Liquidity dries up unexpectedly
• Algorithmic selling accelerates decline

Even though analysts warn for weeks,
fear activates only when prices start falling fast.

8️⃣ So… What causes a stock market crash in one sentence?

A crash happens when fear, liquidity, and selling pressure collide, usually triggered by a sudden macro shock — like tariffs, currency weakness, or unexpected economic news.

Conclusion

Understanding what causes a stock market crash helps investors stay calm when the screens turn red. Crashes aren’t random; they follow patterns — fear, selling pressure, weak currencies, and sudden global shocks. If you learn to read these signals, stay patient, and avoid emotional decisions, you come out stronger on the other side.

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End Note

This analysis is for educational purposes only — not investment advice.
Always research and consult a certified advisor before making financial decisions.