A market break is a radical change in value for either an individual security or the market as a whole. Commonly, this term has a negative connotation, referring to an abrupt fall in value. For investors, a market break can be very dangerous if they are caught on the wrong side of the change in fortunes. Market breaks can also harm the economy as a whole and have a ripple effect on people and companies that are not directly involved in the financial industry.
Market breaks typically occur in response to sudden and unexpected events. A common cause can be a public admission of adverse events or circumstances for a company, such as a major legal judgment or a product recall. Companies try to time these admissions carefully to avoid destabilizing their stocks but commonly, investors become concerned no matter when the admission is made and they can panic, driving stock prices down. There is also a chance that someone else will break the news and ruin the company's planned timing.
The entire market can break in response to natural disasters, wars, and other major events. Investors can become nervous when big news breaks, driving activity up on the market while prices start to drop. Heavily anticipated legislation can also become the cause of a market break, with investors hinging trading activities on whether the legislation passes. Significant good news can also be the driving force of a market break, leading investors to behave with more confidence and causing prices to rise.
These events are unpredictable. Traders, brokers, and other people involved in the financial market follow the news closely and use a variety of resources for keeping up on important information in order to avoid being caught by surprise, but even the most perfect surveillance system can have weak points. Some news breaks explosively and can have a profound impact on financial markets. As people respond and drive the market up or down, a snowball effect can occur as other investors start to become involved as well.
The media tend to report on market breaks when they happen because activity in the stock market is viewed as a major economic indicator. Reporters will discuss whether the market is up or down on their broadcasts and they may provide information about the circumstances that led to a market break. Some analysts specialize in linking specific market events with breaking news for the purpose of following market patterns.
