Something I can't get my head around about the stock market

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junii

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I can only assume that at least 80-90% of people that do invest in stocks must have at least a moderate knowledge of what their doing and how it all works.

So, when there is a big crash or even a small one, how is it that loads of people begin selling their stock, many times even losing money.

Anybody with half a brain you would think would realise that the market is bound to recover eventually so they can get their money back.

Maybe, its just the fact that a major investor will want to get out immediately for fear he may not get his large amount of money for 10-15yrs, is it?

Am I missing out on something here. Please excuse my ignorance if I am.
 
one part of the answer is that a lot of the big investors which often move markets have very short timeframes, measured in hours, not weeks or months and they're constantly balancing their liquidity and overall risk position to provide a service to the market as well as make some quick profits. Another reason is due to the rise of passive or index-tracking strategies; when in falling and rising markets, this strategy tends to exacerbate market movements due to the feedback loop; you sell some shares, they then have a lower weighting in the index, the index-tracker then sells some more to adjust the weighting..and so on.
 
people fail to realise that the stock market represents a stocks price not its value.

Plus there is a definite herd mentality on Wall street.

Also large institutional investors/funds have limits on the losses they can sustain in the market over short periods,so they tend to depress the market further when they bail.
 
junii said:
So, when there is a big crash or even a small one, how is it that loads of people begin selling their stock, many times even losing money.
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There doesn't need to be 'loads of people'. The value of a share can drop with a very low volume of trading.
 
Another answer is that it's all relative.

As a more extreme example, if someone buys a stock years ago at 120c, and the price rises to 325c in the intervening period, if there's a crash, or a worry about a particular stock, they may just wish to take the profits that they have accrued already.

So, they may be selling at 269c, but based on their purchase price, it's still at a profit, though at a peak price of 325c, it might look like a loss.
 
Ok, what if a major investor wants to sell 1million shares for example. What happens if there is no-one else to buy them? Where do they go??
 
if the market moves lower after a reasonable rally you will find that a lot of 'investors' had been riding the rally with an overweight equity position. the downturn encourages everyone to 'lock-in' profits.

also, it is almost impossible to time the bottom of a crash/sell-off and many people turn out to be too shell-shocked by losses to buy into a cheaper market. after all, on the way down how do you know when to buy? better sit on the sidelines or sell now and buy later when you are sure that the market has bottomed out.

sell-offs, as kellyiom has pointed out, are something of a self-perpetuating process. as the market falls retail and institutional investors suddenly rush to pull money out, this prompts redemptions from index and active funds which, in turn, have to sell equities to meet these demands for cash.

bear markets in certain asset classes can last months, years. or even decades (equities post the Great Depression).
 
depends on which company- a million shares in BP wouldn't make even a movement in the share's price while 10,000 in a small company could have a big effect. There's nearly always someone out there wanting to set the price on something. You want to sell then you set the price. If you can't agree the price then you don't sell.
 
junii said:
Ok, what if a major investor wants to sell 1million shares for example. What happens if there is no-one else to buy them? Where do they go??
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They don't go anywhere, they are still there for sale at whatever price they've been put on sale at.
 
daveirl said:
They don't go anywhere, they are still there for sale at whatever price they've been put on sale at.
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Who has them for sale though when the original investor has cashed in? As soon as hes cashed in he doesn't own the shares. So who owns them to sell them or does the seller have to wait for a buyer before he can get money?
 
Also, the herd mentality. Small investors (and massive ones too!) look around, think to themselves 'how come he's selling? What does he know that I don't?' and copy their neighbours etc, leading to a self-fulfilling selling/buying frenzy.

Check out a book called 'Extraordinary Popular Delusions and the Madness of Crowds' by Charles Mackay.
 
im no expert but i can tell u what works for me.................
when 9/11 hit and markets crashed - i bought.....
when elans tysabri drug got pulled and share price crumbled - i bought......
when ryanair issued a profit warning and their share price crashed - i bought...........
all the shares i bought have at least doubled......
i think once u are not in for a quick kill and are prepared to wait 1/2/3 years for share prices/markets to recover, they invariably will......when the sheep buy i sell, and when the sheep sell, i buy........no-one says u have to sell your shares at a loss just coz 'everyone else' is.........
thats what works for me anyway.............
 
tyler_durden said:
im no expert but i can tell u what works for me.................
when 9/11 hit and markets crashed - i bought.....
when elans tysabri drug got pulled and share price crumbled - i bought......
when ryanair issued a profit warning and their share price crashed - i bought...........
all the shares i bought have at least doubled......
i think once u are not in for a quick kill and are prepared to wait 1/2/3 years for share prices/markets to recover, they invariably will......when the sheep buy i sell, and when the sheep sell, i buy........no-one says u have to sell your shares at a loss just coz 'everyone else' is.........
thats what works for me anyway.............
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Fair enough Tyler, but the examples above are more speculation than investment - they are all extremely risky bets.
 
junii said:
Ok, what if a major investor wants to sell 1million shares for example. What happens if there is no-one else to buy them? Where do they go??
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Depending on the shares, there may always be buyers out here. See definition of market-makers . Market-makers are obliged to provide buy and sell prices for stocks at all times. If the stock is covered by a market-maker, normally an investor requesting a market order to sell their stock will find a buyer at the market price when the order is executed.

junii said:
Who has them for sale though when the original investor has cashed in? As soon as hes cashed in he doesn't own the shares. So who owns them to sell them or does the seller have to wait for a buyer before he can get money?
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If the stock the investor wants to sell is covered by a market-maker, then the stock is owned by the market-maker themselves - normally large brokerage houses, or broker-dealers.

As said by others, if there are no buyers out there, and the shares aren't covered by a market-maker, then the investor will have to wait until someone wants to buy them - they will still own them.

In order to sell such shares that lack market liquidity, it's better for an investor to enter a limit order with a defined validity period. Therefore, they are willing to sell the stock at a certain price, for a period of a week. Any time in that week, is someone looks for the stock at that price, the investor gets their money.

See here for more information on the kinds of orders an investor can submit.

Normally the larger, well-known stocks will have market-makers (or some form of market-making type trading such as SETS on LSE).

Lesser known stocks, or smaller cap companies won't have market-makers normally, and this adds to the risk for small investors in that should they want to get out of such a stock quickly, they may not readily find a buyer, and therefore will be exposed to greater losses.
 
Even I am not a Big genie in a Stock Exchange Business. I do have very little knowlege in it. If anyone have any good knowledge in it, and ready to share with such people like with us, we are very happy.
 
mercy said:
Even I am not a Big genie in a Stock Exchange Business. I do have very little knowlege in it. If anyone have any good knowledge in it, and ready to share with such people like with us, we are very happy.
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Many of the better known stock market investing "gurus" have always had the proposition when it came to buying shares. Basically, if you know the company, or the product, or the managers and you like, then it's a good idea to buy the stock. Examples of these are below, as to whether to buy or not buy.

Take Telecom Eireann/Eircom for example. Go back 5 or 10 years and remember what the company was like. People would have had certain negative perceptions of the organisation, it's staff and how it was run. People should have based their investment decisions on this, rather than the blurb that was put out by the government.

Take Aer Lingus now. Do people like the company, the service/product it provides, and the manner in which it goes about its business and manages it's staff? Answers to those will dictate how people might treat that flotation.

Or finally, take Willie Walsh. He was hailed for his work at Aer Lingus, and was head hunted to join BA. Buying shares in BA on the day he joined would see a 50% increase in the value of your holding today.
 
tyler_durden said:
im no expert but i can tell u what works for me.................
when 9/11 hit and markets crashed - i bought.....
when elans tysabri drug got pulled and share price crumbled - i bought......
when ryanair issued a profit warning and their share price crashed - i bought...........
all the shares i bought have at least doubled......
i think once u are not in for a quick kill and are prepared to wait 1/2/3 years for share prices/markets to recover, they invariably will......when the sheep buy i sell, and when the sheep sell, i buy........no-one says u have to sell your shares at a loss just coz 'everyone else' is.........
thats what works for me anyway.............
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That might work in the examples you quoted but what about companies like Enron, Worldcom etc whose shares went down and never got back up. Your strategy is based on the premise that the companies are sound and that they are just going through a 'bad phase'. That is not always the case.
 
"Anybody with half a brain you would think would realise that the market is bound to recover eventually so they can get their money back."

Not so. Look at Japan over the last 20 years.
 
on the Aer Lingus shares,i read recently that the minmum needed to invest will be 10k.. that put's a lot of small timers out straight away.

in my 10 years of stocks and shares i have been in and out of many companies and i tend to agree with Tyler Durden(great handle to use BTW)

buy on the rumour and sell on the news seems to be a philosophy that works for me and i do believe all investing is speculation just that some people are afriad to admit that all they are doing is speculating ,albeit in different degrees of risk
 
junii said:
Who has them for sale though when the original investor has cashed in? As soon as hes cashed in he doesn't own the shares. So who owns them to sell them or does the seller have to wait for a buyer before he can get money?
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The marketmaker.

A "market maker" is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price. You'll most often hear about market makers in the context of the Nasdaq or other "over the counter" (OTC) markets. Market makers that stand ready to buy and sell stocks listed on an exchange, such as the New York Stock Exchange, are called "third market makers." Many OTC stocks have more than one market-maker.
Market-makers generally must be ready to buy and sell at least 100 shares of a stock they make a market in. As a result, a large order from an investor may have to be filled by a number of market-makers at potentially different prices.

See www.sec.gov/answers/mktmaker.htm
 
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