Recent volatility across sharemarkets globally has been a stark reality check to investors just how quickly the mood and momentum in markets can change. It has also stoked fear that we may be on the verge of a major market correction.

This raises the question of what causes sharemarkets to crash and how investors can best prepare their portfolios.

There are many common factors that can lead to a sharemarket crash:

Economic bubbles. When there is excessive optimism that leads to a sharemarket bubble, which has the potential to burst and cause a market crash.

Speculation. Investors purchase stocks with the hope of them becoming more valuable in the future. This is often focused on a particular sector or industry. For example, the dotcom bubble focused on speculation of technology stock

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