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



## junii (26 Jul 2006)

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.


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## kellyiom (26 Jul 2006)

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.


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## dunkamania (26 Jul 2006)

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.


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## daveirl (26 Jul 2006)

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.


There doesn't need to be 'loads of people'. The value of a share can drop with a very low volume of trading.


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## Humpback (26 Jul 2006)

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.


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## junii (26 Jul 2006)

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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## JohnBoy (26 Jul 2006)

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).


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## kellyiom (26 Jul 2006)

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.


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## daveirl (26 Jul 2006)

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??


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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## junii (26 Jul 2006)

daveirl said:
			
		

> They don't go anywhere, they are still there for sale at whatever price they've been put on sale at.



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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## Sherman (26 Jul 2006)

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.


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## tyler_durden (26 Jul 2006)

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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## Sherman (26 Jul 2006)

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...........
> ...


 
Fair enough Tyler, but the examples above are more speculation than investment - they are all extremely risky bets.


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## Humpback (26 Jul 2006)

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??


 
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?


 
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.


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## mercy (26 Jul 2006)

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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## Humpback (26 Jul 2006)

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.


 
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.


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## Squonk (26 Jul 2006)

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...........
> ...


 
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.


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## HighFlier (26 Jul 2006)

"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.


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## therave (26 Jul 2006)

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


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## Grizzly (26 Jul 2006)

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?


 
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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## Humpback (26 Jul 2006)

therave said:
			
		

> 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.


 
Discussed here on AAM already. The €10000 limit is applicable to those retail investors who wish to purchase shares in the IPO.

Once the shares are traded on the secondary market, anyone will be able to buy any amount of shares, with no lower limit on value of holdings purchased.


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## junii (26 Jul 2006)

ronan_d_john said:
			
		

> 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.
> 
> ...



Yes but assuming BA has 1million shares, wouldn't these be all snapped up by regular investors who get an allocation through the broker.

And also, what would have happened if all 1million shares had been already owned before willie walsh was announced.


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## Humpback (26 Jul 2006)

junii said:
			
		

> Yes but assuming BA has 1million shares, wouldn't these be all snapped up by regular investors who get an allocation through the broker.
> 
> And also, what would have happened if all 1million shares had been already owned before willie walsh was announced.


 
You're getting confused now (or are you just having a laugh? I'm not sure). BA would have gone public (shares sold to the public) years ago, so there's no allocations, just buying and selling BA shares on the stock market.

So, when Willie Walsh joined, all the shares were in the hands of shareholders already - either large institutions or individual investors, or whatever.

On that day, some people might have taken the view that with a "mick" taking over the company, that the company wasn't worth owning any more, and sold. Or others might have seen what he did with Aer Lingus and decided to buy.

You now have people buying and selling in the market, their requirements match off, or almost match off or whatever, and those that want to sell sell, and their shares are bought by those that want to buy.


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## therave (27 Jul 2006)

ronan d john

apologies for the confusion what u have said is what i had intended to say


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## junii (27 Jul 2006)

ronan_d_john said:
			
		

> You're getting confused now (or are you just having a laugh? I'm not sure). BA would have gone public (shares sold to the public) years ago, so there's no allocations, just buying and selling BA shares on the stock market.
> 
> So, when Willie Walsh joined, all the shares were in the hands of shareholders already - either large institutions or individual investors, or whatever.
> 
> ...



Tbh honest im not having a laugh, I was just finding it difficult to think about this straight because of the many terms et cetera but its becoming more clear now.


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## Humpback (27 Jul 2006)

junii said:
			
		

> Tbh honest im not having a laugh, I was just finding it difficult to think about this straight because of the many terms et cetera but its becoming more clear now.


 
Then you really need to steer clear until you know more about it. Check out one of the books recommended on learning about the stock market. And then you're probably better going with professional advice rather than doing anything on your own.


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## junii (27 Jul 2006)

Yes, I will be steering clear until I understand it completely. I am technicially minded so I should have no problem understanding it. Its just there is a steep learning curve at the beginning. Like with computers theres so many Acronyms and terms the same can be said of financial services and the stock market.


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## Satanta (27 Jul 2006)

ronan_d_john said:
			
		

> Then you really need to steer clear until you know more about it.


I'm guessing you J, like many of us, are interested in these issues for future potential investment rather than immediate investment (similiar to RDJs suggestion of doing further investigations before jumping in). Just incase I will point out that given another thread relating to getting a loan (http://www.askaboutmoney.com/showthread.php?t=33073) was made, you should (probably*) try and clear debt(s) before investing in (potential long term) stocks.

*You WILL be paying high interest rates on the loan. You MAY make more in the investment but it is a (fairly large) risk (paying the loan is a guaranteed "return", investing is not), if you can be confident of a return meeting loan APR amounts then fair play. Your in the wrong job! 

It's down to your own attitude/opinion/view, but thought it worth mentioning just incase anyone reading hadn't come across/considered this before. Look around AAM, or anywhere else which gives good financial advice, and they will in the majority of instances suggest clearing debt before contemplating investments.


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## kellyiom (27 Jul 2006)

ronan_d_john said:
			
		

> 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.
> 
> ...


 
I think this is a good point, well made. We had a debate on here about identifying growth prospects and selecting managers and this was one area that I reckon active management can make a difference in. Sounds a bit like 'cult of personality' but think it does give an edge in picking investments


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## tyler_durden (27 Jul 2006)

Squonk said:
			
		

> 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.


 
it has worked all the time for me! i thoroughly research the company and stock price before i invest, and keep my portfolio under 5 stocks at all times......more than that is too difficult to manage in my opinion........

i failed to see how ryanair were high risk when i bought them after the profit warning - they were, and still are, the most profitable airline in europe........a companies share price is largely based on profitability.......

i also failed to see how elan was not an absolute bargain when it crashed to circa e4 - in my opinion tysabri was always going to be relaunched as the cases of PML only occured in 0.1% of patients when taking it in combination with avonex (another MS drug produced by Biogen) - taken as a monotherapy, the drug produced NO cases of PML - and u had to bear in mind that this drug has the potential to reep >$2 billion in revenue if it returned to the market........which it recently has........a companies shareprice is largely based on profitability.......

im not suggesting everyone go out and buy elan or ryanair -im just letting u know the methods i used myself before buying - they were extremely researched and educated bets..........

people keep telling me - "ah, sure buyin shares is the same as bettin on a horse".....NONSCENCE!!....if a horse falls at a fence or comes in 2nd and u have backed it to win u do not get any money - u lose, u get zero...........if a company misses a projected Q2 revenue or gets a profit warning or whatever - u have the OPTION to lose by selling, or the option to hang on and ride the wave.......this option does not exist is horse betting..........


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## Humpback (27 Jul 2006)

tyler_durden said:
			
		

> it has worked all the time for me! i thoroughly research the company and stock price before i invest


 
This was not the impression that you gave in your original postings. If I remember, you gave the impression that you bought in the opposite way of other investors, purely because of their actions, rather than because of the principles behind the company you were investing in.

So basically you are taking advantage of a price opportunity in companies that you like, rather than just buying when most people sell. You should have been clearer on that. There is a serious difference in the investing policy you're engaging in compared to what you led us to believe originally.



			
				tyler_durden said:
			
		

> i failed to see how ryanair were high risk when i bought them after the profit warning - they were, and still are, the most profitable airline in europe........a companies share price is largely based on profitability.......


 
Yes, a profitable airline that has shown a growth of only about 10% in about 3 years since I invested. And a profitable airline that has never paid out any dividends. Despite being profitable, both these aspects in my mind would not indicate that Ryanair is a buy, or a sell.


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## tyler_durden (27 Jul 2006)

"So basically you are taking advantage of a price opportunity in companies that you like, rather than just buying when most people sell"....ronan d john

 Let me clarify, its simple really.............I am taking advantage of a price opportunity in companies that i like, WHEN most are selling, based on the reason they are selling..........


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## killeoin (27 Jul 2006)

tyler_durden said:
			
		

> i also failed to see how elan was not an absolute bargain when it crashed to circa e4 - in my opinion tysabri was always going to be relaunched as the cases of PML only occured in 0.1% of patients when taking it in combination with avonex (another MS drug produced by Biogen) - taken as a monotherapy, the drug produced NO cases of PML - and u had to bear in mind that this drug has the potential to reep >$2 billion in revenue if it returned to the market........which it recently has........a companies shareprice is largely based on profitability.......


 
I actually bought elan at 2.80 and sold at 14.80...
I thought along the same lines as you...However....
Do you know out of the thousands of drugs taken off the market how many were actually relaunched?
2...and that includes tysabri. It was a huge risk to take to buy into it and don't pretend it wasn't/isn't if you still hold them.


BTW Is this not discussing individual shares?


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