Stock Market Crash Law and Legal Definition

A Stock Market Crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. It resultis in a significant loss of paper wealth. Crashes usually occur under the following conditions: a prolonged period of rising stock prices and excessive economic optimism and also in a market where price-to-earnings (P/E) ratios exceed long-term averages, and where extensive use of margin debt and leverage by market participants exists.

P/E ratio of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. Wall Street Crash of 1929, which was followed by Great Depression, Black Monday of 1987, the crash of 2007 are a few examples for Stock Market Crash.