See List of 5 Tips for Details
For new Independent Investors and new Retail Traders a Stock
Market crash is a very scary event. They do not know what to think and
wonder what they should do, hold and wait or sell and run. Many times the
information they hear on the news is inaccurate or misleading.
Here is a list of tips for details on a better
understanding of why does a Stock Market crash:
1. There are two sides to every stock transaction, a buyer
and a seller to maintain an orderly market. The structure is designed so that
there will always be a buyer and seller, as Market Makers step in or High
Frequency Trading firms acting as Market Makers offer stock out to complete the
order.
2. For every buyer of a stock order, there must be someone
willing to sell stock of an equal amount. Sometimes orders are grouped in order
to meet the demand of the buyers. For example there may be a buyer who wants to
buy 1000 shares of stock, and sellers who want to sell 100 shares which are not
enough to fill the order. The Market Maker computers since this is all
automated now, will go and search for sellers who equal 1000 shares and this
may be one seller or many sellers.
3. All orders must be filled within a set amount of time,
which is required by law. Usually a retail order will fill within a minute or
less, often within seconds.
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4. When there are too many people who want to sell their
stock, and there are no or very few buyers the stock price will fall because
there is a lack of buyers. When prices are falling most people are afraid to
buy a stock. The result is that stocks tend to fall faster than they move up.
5. Most investors believe those who are Selling Short cause
downtrends. What they do not realize is that selling short provides the buy
side during a Stock Market sell down, when panicked investors want out of
stocks. Without “Buy to Cover” as the Sell Short buying is called, stocks would
fall faster, steeper, and lose far more value. The reason why Selling Short is
legal, is because the market needs someone to buy, as the stock is losing value
and falling. Without Buy to Cover orders, stocks would fall faster and lose far
more value.
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or improve your trading in the Stock Market.
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Summary
Understanding the mechanisms of the market is important, especially a Stock Market crash. When investors and traders understand how something works and why it works the way it does, it helps them make informed decisions rather than acting on fear of losing money or greed when prices are rising speculatively. Rarely do investors buy low and sell high. This is because they do not know how to read stock charts, which would show them what is really going on with a stock price.
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Trade Wisely,
Martha Stokes CMT
Chartered Market Technician
Instructor and Developer of TechniTrader® Stock and Option Courses
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