Why is the stock market plunging so fast?
by Author on Saturday, September 4th, 2010 | 6 Comments
It seems that all at once the stock market started dropping. Why is it dropping so fast? What are the causes? Please make sure your answer is educated, specific and NOT a blind guess. Thanks.
Related Stock Sites
If you enjoyed this post, make sure you subscribe to my RSS feed!
The stock market is falling so fast due to banks not being able to lend out money. Many of the top banks gave out mortgages to people that are now foreclosing so those loans are not being paid back and that leaves the banks in a deficit. Banks are one of the nation’s main source of income so if banks can’t lend money, no money is being generated or spent and this causes the stock market to slow drastically. No one is buying anything because no one can get credit to buy homes, cars or loans so this in turn slows our economy. It’s really messed up
its droppin cuz of bush he fxxked up the whole economy
Short term (called overnight) loans are necessary for a lot of companies – particularly financial companies – to do business and, therefore, survive. Financial companies have many diversified investments that they maintain as a hedge against their core businesses having a downturn. One of those investments was bundled mortgage packages and another was stocks.
With the mortgages going bad (people being foreclosed on), the financial institutions are running out of money and are having to liquidate other securities, like stocks, because the overnight loans are not available (no one has any money to offer credit, or they think it’s a risky investment). If a lot of people start selling stocks, the laws of supply and demand causes the price to go down (lots of inventory and low demand, hence lower prices).
When people are heavily invested in stocks as a major investment, and the price starts to fall, a lot of people take their money out of the stocks, resulting in further drops in stock prices. Many stock brokers also have a built-in price (a put) that, when a stock gets down to a certain level, they automatically sell via computer programs. So, when the stocks reached this threshold, their computers dumped the stocks, further lowering prices.
I don’t know how low the stock market is going to go. But, I anticipate a lot of volatility (large up and down jumps one day to the next) for at least a month or two, and this also could hinge on the presidential election. And, at some point, people will put their money back into the stock market. Those who time it well will reap great rewards. But, right now, everyone is abandoning the stock market for more conservative and safe investments, like government bonds and money market accounts.
The average bear market bottom is 40%. When that is found things will turn around. They may retreat 33% more after a rapid run up, but 40% to the downside marks the historical bottom. The short sell ban has accelerated the process as it has force a huge amount of volume from the markets. The loss of liquidity and lack of volume translate directly into greater and more dramatic declines at one time.
Hedge funds and mutual funds are having to liquidate anything and everything due to holders wanting their positions cashed out. This creates more supply than demand, and prices fall.
President Bush is going to speak at 10AM on Friday, 10/10/2008.
I’m curious if his speech will screw it up any more.