What Made the Stock Market Crash
Unless you have been living under a rock for the past few years it is pretty obvious that we are in the middle of a financial crisis but does anybody truly know what made the stock market crash? Was it the banks that over extended themselves lending truck loads of money to every man and his dog (in some cases even lending money to the dog itself). The banks didnýt seem to worry about the ability of their customers to repay the mortgages, you simply needed to have a pulse and you could have some money. So was it the banks fault? Yes to a certain extent but surely there were other factors? And what about the non-banks? Their share prices have been slashed as well yet many of them werenýt involved in the subprime crisis at all? So once again I ask what made the stock market crash? To find the answer I would like to have a look at the more basic concept of human emotion and the effects they had on the stock market crash.
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If we look back at the stock market history it becomes very clear that the stock market rises slowly and falls quickly. This has pretty much always been the case if you look at the stock market crash of 1929 or the recent bull market that we have experienced. Generally it takes less than a year to wipe off half a dozen years of strong market gains. So why is this the case and more importantly what can we do about it?
Stock markets fall faster than they rise because people react quicker to fear than they do to greed. What? But that doesnýt make sense ý surely most people are extremely greedy? While they might be, they are generally more scared of fear than they are concerned with greed. Let me explain.
When the stock market is rising more and more people invest their money into shares. More importantly more and more ýnew investorsý start to put their savings into the stock market. As a bull market develops this happens more and more because there are now more stories around about people making good returns on their shares. It normally takes people quite a while to believe these stories but eventually they start hearing from everywhere how well the stock market is going so they start putting some of their own money in too. Unfortunately by the time lots of these people put their money in the bull market has just about run out of steam. Will you hear about this in the newspapers? No, markets have a funny habit of doing the exact opposite of what most thin they will. So as you can see whilst greed is a strong emotion it normally takes a long time to build up.
On the other hand fear seems to take over extremely quickly. As soon as the market starts to tip over it can move 10-50% in a few weeks or months. Why? Because people are extremely fearful of losing their profits that they have made during the bull markets. More importantly they are fearful of losing the things that they have already bought in their minds with the profits.
So what made the stock market crash? Whilst the banks were the catalyst it was combination of fear and greed that actually caused the market to swing so radically.
