Why Does A Stock Market Crash

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.

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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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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
TechniTrader DVDS with every course.

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