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2/13/2013 10:35:00 PM
6
Economics question
If and when panic selling occurs in stock markets, does that devalue the price of stocks and render the market almost worthless, because more and more stocks are introduced into the market (increasing supply) and there is no demand?
See the 1929 Wall Street Crash.
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If demand is greater than supply, the price goes up (inflation). If supply is greater than demand, the price goes down (deflation). That goes for stocks too.
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1 ReplyMany thanks, all. So, I can say that the stock market was almost worthless in the Wall Street Crash?
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When you talk about panics you're usually talking about the bursting of a bubble. Bubbles happen because people expect future demand to be far above sustainable levels. If you look at the 29 crash, the tech bubble, or the housing bubble, they were fueled by speculation that demands for stocks/property would drive prices higher for the foreseeable future. Now the initial popping of the bubble usually occurs because of insufficient demand relative to expectations. If you want to oversimplify things, you can picture a local housing market where investors are building houses and selling them rapidly and making a decent profit. As time goes on prices get higher, but people still buy up these new houses. One day, an investor lists his brand new house for $1 million and no one buys it. People realize that the demand at this price level isn't what they expected. Then the market floods with excess supply as everyone is trying to get the best deal before prices drop even lower. That can be boiled down to a case of excess supply relative to previous expectations. It can happen with houses, stocks, beanie babies, [url=http://en.wikipedia.org/wiki/Tulip_mania]tulips[/url] or basically anything else. tl;dr Yes
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That was how many people lost their life savings in the most recent recession. If you listened to the fringe loonies, you lost it all. If you ignored them and listened to REAL advisors, you gained money, like I did. The market has ALWAYS returned with a gain, including RIGHT NOW.
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Exactly. The price of the stock at any given time reflects the combination of the number of people who are willing to buy a stock and the number who are willing to sell. In a panic the supply drastically increases and/or the demand drastically decreases.
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Edited by Funkbrotha10: 2/13/2013 10:37:06 PMYes, when people panic sell the price of whatever they are selling drops. which then prompts more panic selling, and more price dropping....
