Stock Market Crash: Where does all the Money Go?
Posted 10. Aug, 2009 by Lorraine James in Options Trading, Stock Investing
We’ve experienced a few of them over the last year and a lot of investors and traders are still hanging around not participating, remaining undecided until the Bull really shows it’s horns in full swing.
Have you ever wondered on those days where billions of dollars are wiped off the market almost suddenly, what actually happens to that money…..surely it can’t just disappear can it?
In essence, the Stock Market is really just made up of buyers and sellers. And all of them are human. Most people base their buying or selling decisions on human emotion (to be more precise, fear and greed)…and that is exactly what causes a Stock Market Crash!
When enough sellers offload a stock because of their own fear of loss based on something they’ve heard, it will cause the price of that stock to drop. In the event of a disaster or bad news, especially on a global scale, when those sellers panic and sellout on a mass scale, we see prices plummet!
This is what causes a crash…but where does the money go?
Think about this – there has to be someone willing to buy for a panicky investor to successfully sell their shares doesn’t there?
And if a company has solid financial prospects, has great management and presents a very good ground for investing in before a stock market crash occurs, then what has changed about that company during and after a market crash?
For most companies like that, the only thing that changes is their share price.
For the savvy investor……this represents a spectacular buying opportunity.
So while the novice investor dumps their stock and leaves the market once conditions become undecided or volatile, the savvy investor rubs their hands together in glee. This is the guy (or girl) who loves a Stock Market Crash, because more often than not, the volatile times are when the best bargains are to be had, just ask Warren Buffett.
Throughout a bear market, the only thing that affects a company’s falling share price is the downturn in economic and market conditions. And while we as humans tend to think the good times will never end while we’re in them, we also give in to the assumption that when things are bad that they will remain that way forever.
During these conditions, those who are inexperienced, impatient and fearful will often oversell their shares. So a stock market crash is really just a means for transferring funds out of the hands of those who don’t know what they are doing and into the hands of those who know exactly what they are doing.
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