ELI5 how exactly the stock market crushes. If there’s a sell off, that means there are buyers, so why would the price drop drastically? If there are no buyers, what’s the reason for a panic when in most cases the demand always recovers?
ELI5 how exactly the stock market crushes. If there’s a sell off, that means there are buyers, so why would the price drop drastically? If there are no buyers, what’s the reason for a panic when in most cases the demand always recovers?
Comments
Cause you have to drop the price to sell them. If I have a pen for 2 dollars and you have the same pen you have to sell it at 1.90 to beat me. And then I have to sell mine at 1.80 to beat you.
The price falls because people are so desperate to get rid of their stocks that they lower the selling price until someone buys.
Demand will eventually recover… but who knows when? It could take years and some companies might go bankrupt. People would rather swap their falling stock for stable stock asap to be safe.
Stocks are ownerships in actual existing companies and corporations.
When the company is going well, the price of each share goes up to reflect the value of the company.
When the company is going badly, which would happen when their wares becoming extremely expensive to produce due to raw material costs suddenly rising 35% overnight, they are less worth and the prices of their stocks go down.
When people trading see that the company has no way of recovering quickly, they are not interested in buying those shares.
I have a stock that was worth $200 yesterday. Due to new developments, I don’t think it’s worth that much anymore, I think it’s only worth $150 so I try to sell it for as much as I can.
Because everyone heard the same news, there’s nobody willing to buy it for $200. But there is someone willing to pay $180 since they don’t think the news is as bad, so I sell it for that price since it’s more than the $150 that I think is a good value.
Now everyone knows the new trading price is $180, so that’s what the stock is “worth”. It just lost 10% of it’s value from yesterday.
There are always sellers and buyers. Its just a question of price. In a crash there are less buyers for a higher price so sellers if they need to sell have to sell for a lower price. Over decades yes the price has always recovered so far but not everyone can wait that long to sell. Then there are other implications. Stocks can be used as collateral to borough against. Those loans usually have a stipulation that if the stock price falls under x price the stock will be sold so the bank doesnt lose its money that means more sellers so the price drops even further.
That is how markets work. Some people think it is not worth holding at $X and it will fall, others think it is worth buying at $X and the price will rise. If more people are in the former than latter, then some will NOT be able to sell it at $X and may have to settle at $Y (a lower price) and generally a lower price might attract more buyers.
The subtle thing is that if X is $10, Y is not necessarily $9.99. Y might be $9.00 or $8.00. There is no rule that forces prices to go down steadily. A crash is when prices go down in one big fall.
Say you’ve got some AAPL to sell. You see the current price is listed at $200, so you offer to sell for that much. No one bites. You still want to sell, so you drop the price to $195 and so on. Eventually you manage to sell at $192. Ultimately there was a buyer for your sale, but you had to lower the price to make that sale happen. It’s ultimately just like an auction house.
The panic question is more nuanced. Lots of long terms investors don’t panic, I’ve happily ignored a bunch of economic downturns and been better off for not panic selling. But if you’ve made some short term bets, you’re going to be scrambling to try and minimize the damage. And of course, there’s no guarantee things recover anytime soon, you might be better off moving your money elsewhere. No one really knows what the future holds.
The people buying when it drops are gambling that the market hit bottom. If they keep doing that, eventually they’ll be right. You won’t know until later.
There’s also something called shorting stocks. Long story short, it’s basically a way to profit by gambling that stock prices will go down. That drives a lot of the sales during drops.
If there’s more selling pressure than buying, sellers will constantly have to adjust their prices down in order to hit bids. Same in reverse for prices going up. It’s all about the relative volume. Also, if buyers are particularly bearish you can have less buying pressure than selling, and have people setting their buy prices at much larger lower intervals than during more typical balanced market periods
Typically the value of a stock is an agreed upon price between buyers & sellers. If a seller values a stock at $100, but no one is willing to buy above $80, then the value is really the $80. With the crash of a stock, there will be some buyers in hopes that it won’t drop further & will rebound higher to make money. The panic that sets in, is the fear that the value at which a person bought it for will never rebound to that level so they attempt to cut their losses as quickly as possible to avoid greater losses.
There is no guarantee that the demand will always recover, merely the hope. A good example of this is in 2008 both Lehman Brothers & Bear Sterns, whom no longer exist due to bankruptcy filings & being acquired by other companies at a big discount.
>If there’s a sell off, that means there are buyers
False.
There already are buyers, you choose to do sell offs to keep them or to keep some profit on a hard-to-sell batch. One thing does not imply the other.
One example of buyers not being present enough was 1930’s housing crisis (in this case because prices were inflated until something crashed. ELI5 story is, debts where passed around between companies and never got paid, it became a circlejerk and dragged everyone down with it)
More people want it more it’s worth. Think of it as collectibles. Everyone wanted tesla stocks because they had a bright future in ev. The cyber truck was so bad people lost confidence that tesla can lead EV sales and then his political stunt made it obvious he’s not concerned about the health of the company so everyone sold their shares and noone wants to buy it so tesla has no stable financial backing.
Say you want to buy a new tv. You’ve spent hours researching and comparing and have finally settled on the exact brand/model tv you want for your home. But it’s priced at $500. Which you think is way too much for a tv. So you don’t buy it. Suddenly, Walmart drops the price on that tv to $300. So you see that and you’re like that’s a great deal on the tv I want. So you immediately go and buy it.
Big institutional investors spend their time researching companies and will arrive at a target price they think the stock is worth. Sometimes the stock is trading much higher than they think it’s worth so they don’t purchase any. When a market sell off like this happens the company’s share price drops, maybe it drops the price to a range that you consider a good value so you purchase it
The sellers outnumber the buyers, so they have to drop the price they’re willing to sell for until the number of buyers equals the number of sellers. The most recent sale is the current stock price.