What they are, why they happen, and why you'll be okay
Rumours of a stock market crash can feel unsettling. It doesn’t help that news and social media seem to be competing to maximise the drama.
But here’s the thing: most people will live through multiple crashes in their lifetime. Experiencing one for the first time is almost an investing rite of passage.
Once you know what starts a crash, how long it’s likely to last and what happens afterwards, the idea of one probably won’t feel as daunting.
By the end of this guide, you’ll understand:
What a market crash is
What causes market crashes and how often they happen
Whether you can predict a market crash
What happens when a market crashes - and what you should do
How to prepare for a market crash
What is a market crash?
A stock market crash is a sudden, widespread drop in share prices.
But not every dip counts as a crash – markets have their own vocabulary for different kinds of movement:
A dip or pullback is a small, short-term drop
A correction or sell-off is more significant
A crash is the sharpest kind of fall – typically 10% or more over a day or a few days
A bear market is when prices fall steadily over a longer period, usually months
And on the upside:
A rally or recovery is when prices climb back up
A bull market is a sustained period of growth, often lasting months or years
Here’s the really important bit: these ups and downs are what make it possible to grow your money by investing. The downs are scarier than the ups - but both are normal and a necessary part of the system.
What causes market crashes?
Various things can trigger a market crash, like:
A political upset, like the announcement of new US import tariffs, which triggered a crash in 2025.
A military conflict, like Russia’s 2022 attack on Ukraine.
A global scare, like the COVID-19 pandemic in 2020 or the 11 September attacks in 2001.
A financial bubble bursting, like the housing bubble that crashed in 2007.
Whatever the trigger, the underlying cause is almost always the same: fear and panic selling.
An unexpected event can spook investors, and they start to pull their money out. This starts a wave of panic, with remaining investors rushing to sell as they see the value of their portfolio falling.
Only the first to sell will avoid a loss. For most of the others, it would be wiser to wait for prices to recover. But in a state of panic, it’s hard to act rationally.
How common are market crashes?
They don’t follow a schedule, but crashes typically happen once or twice per decade. Corrections tend to come every year or two, and dips can happen several times a year.
Market upturns are about as common as downturns, but they tend to be more intense or longer lasting. Look back at market data and you’ll see that the overall price movements for periods of ten years or more have almost always been upwards.
Can you predict a market crash?
Honestly? No – and anyone who claims otherwise is guessing.
Crashes are inevitable, so it’s why we should always expect another in the future. There are almost always rumours that the next one is approaching, and discussions around the signs that point to it.
Right now, for example, people are talking about an AI bubble – the idea that investors may be overpaying for tech stocks driven by hype rather than value, leaving them ripe for a fall.
But no one can say when this might happen, or by how much. Should you invest now, and enjoy the growth before any potential crash? Or wait until after, when prices may be lower? There's no reliable answer.
What you can do is invest for the long term and accept that a crash will happen when it happens. That's not giving up – it's actually the smartest approach most experts recommend.
What happens after a market crash?
Sometimes, markets bounce back quickly – within days or weeks, prices can recover and even exceed their previous levels. Investors who sold during the panic often miss out on this recovery entirely.
For example, the COVID-19 pandemic triggered a drop of more than 30% in the S&P 500 between late-February and mid-March. By August, the index had recovered this loss, and it then grew by 30% over the next year*.
In other cases, a crash is followed by a bear market: a slower, extended decline lasting months. Past bear markets have been unpleasant for investors, but they’ve always eventually come to an end. At some point, the market turns and starts to grow again.
A recent example is the bear market of 2022, triggered by factors including Russia’s invasion of Ukraine. The S&P lost more than 25% of its value between January and October, and only fully recovered this loss at the very end of 2024. Since then, it’s grown by more than 40%.
What should you do when the market crashes?
Firstly, it helps to stay calm. It’s up to you what to do, but try to avoid making rash decisions in the heat of the moment.
Consider your two main options and what’s likely to happen next:
Option 1 - Sell.
Selling your investments might mean accepting a loss. You could try to predict the best time to buy back into the market, when it appears to be about to turn. You might move too soon and experience further losses. Or you might move too late and miss out on a period of rapid growth. It's very difficult to get this right.
Option 2 - Do nothing.
Your investments might immediately recover, or they might take longer. You won't know when the turn will come – but you'll know that, throughout history, it always has. And when it does, you'll have been there for every penny of the recovery. Unless you need your money in the short term, staying invested is the more reliable path.
How can you prepare for a market crash?
Good news: you don't need to predict a crash to be ready for one. Here's how to set yourself up:
Only invest money you won’t need soon. Be prepared to leave it invested for several years, giving the market time to recover.
Diversify your investments. Spread your money across a wide range of shares and funds - not all companies recover from a crash, so don't put all your eggs in one basket. When you invest with Zopa, your money is automatically invested this way; our funds are diversified across more than 2,000 companies.
Keep a cash buffer. Set aside enough savings to cover several months of essential spending, so you're never forced to sell investments at the wrong moment. A Cash ISA is worth considering here - your money stays accessible whenever you need it.
Know yourself. If a sharp drop in value would genuinely cause you sleepless nights, it's worth holding a larger proportion of lower-risk assets, like bonds, which tend to move more slowly and steadily. You can choose to invest in funds suitable to your attitude to risk. For example, Zopa’s Balanced fund is suited to more cautious investors, while our Bold fund is better for more adventurous investors.
Reduce risk as you approach withdrawal. If you're planning to access your money within a few years, gradually shift to a more cautious mix - for example, moving from 75% shares down to 25%. A crash will affect you far less.
Understand the psychology of panic selling - and choose not to follow the crowd.
If you’ve taken sensible precautions, there’s no need to worry about exactly when the next crash will happen, or what to do. Your plan is already in place.
Investing made easy with Zopa
We know investing can feel daunting – but we’re here to make things simple. Just pick from 2 ready-made funds – diversified and designed to weather the ups and downs of the market. Invest as little as £1 and let the experts do the hard work for you. Explore investing with Zopa.
*Source: https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
