May 6, 2010 stock market decline/plunge: Why did it drop 9% in a few minutes?
"No one is quite sure what happened (yet).  Speculation includes: The interesting thing is that Procter & Gamble stock got hammered, as did Accenture.  Both of which are fairly stable companies, that didn't make any major announcements, and aren't really connected to the current financial instability in Greece.  So, there is no reason for there stock prices to have gone crazy like that.  This points to some kind of screw up, and not a regular market force. Apparently, the trades involved in this event are going to be canceled. Edit #1: One thing that can contribute to an event like this is automatic selling triggered by stop loss orders.  Say someone at Citi makes a mistake and sells too much of a stock.  That drives the stock price below a certain threshold.  Computers that were pre-programmed to sell at that point start doing their job.  Now the price goes even lower.  More stop-loss orders get triggered.  Things start to snowball.  Since it's all done by computer these days something like this can happen in seconds.  All the humans are left scratching their heads. (No idea if that's what actually happened.) Edit #2: IEEE Spectrum has a pretty concise article on the topic.  It also includes some links to follow. Edit #3 (05/14/2010): Reuters is now reporting that a trader at Waddell & Reed triggered all of this, but not through any wrongdoing. Edit #4 (05/18/2010): Waddell & Reed claims they didn't do it.  The House Financial Services Subcommittee investigated, but they couldn't find a ""smoking gun"".  I think at this point, people have pretty much given up trying to figure out what happened. Edit #5 (07/14/2010): The SEC still has no idea.  I'm giving up. :-)" I hate attributing an event like this to a single cause.  That implies that the market is an orderly system where everything operates smoothly.  I prefer to see it as much chaotic. When I see a drop like that happen, I'd say that there were a lot of sellers of stocks and all the buyers were bidding less and less for those few minutes.  Perhaps the catalyst for that was a typo or a strange order.  But in the end all the participants in the market responded by bidding down stocks, not just one person.  It takes sides to complete a trade. I know my model is a bit simplistic...  I'd be happy if someone corrected me :-) Trading error at Citi "Part of it was an Oops, but not all of it. There were reports that the sudden   drop was caused by a trader who   mistyped an order to sell a large   block of stock. The drop in that   stock's price was enough to trigger   ""sell"" orders across the market. Source: http://www.msnbc.msn.com/id/36983596/ns/business-stocks_and_economy/"
Investing in the stock market early is a good thing.  However, it does have a learning curve, and that curve can, and eventually will, cost you. One basic rule in investing is that risk and reward are proportional.  The greater the reward, the higher the risk that you either (a) won't get the reward, or (b) lose your money instead.  Given that, don't invest money you can't afford to lose (you mentioned you're on a student budget). If you want to start with short but sercure investments, try finding a high-interest savings account or CD.  For example, the bank I use has an offer where the first $500 in your account gets ~6% interest - certainly not bad if you only put $500 in the account.  Unfortunately, most banks are offering a pittance for savings rates or CDs. If you're willing to take more risk, you could certainly put money into the stock market.  Before you do, I would recommend spending some time learning about how the stock market works, it's flows and ebbs, and how stock valuations work.  Don't buy a stock because you hear about it a lot; understand why that stock is being valued as such.  Also consider buying index funds (such as SPY) which is like a stock but tracks an entire index.  That way if a specific company suddenly drops, you won't be nearly as affected.  On the flip side, if only 1 company goes up, but the market goes down, you'll miss out.  But consider the odds of having picked that 1 company. "If you're asking this question, you probably aren't ready to be buying individual stock shares, and may not be ready to be investing in the market at all.  Short-term in the stock market is GAMBLING, pure and simple, and gambling against professionals at that. You can reduce your risk if you spend the amount of time and effort the pros do on it, but if you aren't ready to accept losses you shouldn't be playing and if you aren't willing to bet it all on a single throw of the dice you should diversify and accept lower potential gain in exchange for lower risk. (Standard advice: Index funds.)  The way an investor, as opposed to a gambler, deals with a stock price dropping -- or surging upward, or not doing anything! -- is to say ""That's interesting. Given where it is NOW, do I expect it to go up or down from here, and do I think I have someplace to put the money that will do better?"" If you believe the stock will gain value from here, holding it may make more sense than taking your losses.  Specific example: the mortgage-crisis market crash of a few years ago. People who sold because stock prices were dropping and they were scared -- or whose finances forced them to sell during the down period -- were hurt badly. Those of us who were invested for the long term and could afford to leave the money in the market -- or who were brave/contrarian enough to see it as an opportunity to buy at a better price -- came out relatively unscathed; all I have ""lost"" was two years of growth. So: You made your bet. Now you have to decide: Do you really want to ""buy high, sell low"" and take the loss as a learning experience, or do you want to wait and see whether you can sell not-so-low. If you don't know enough about the company to make a fairly rational decision on that front, you probably shouldn't have bought its stock." "First, you mentioned your brother-in-law has ""$100,000 in stock options (fully vested)"". Do you mean his exercise cost would be $100,000, i.e. what he'd need to pay to buy the shares? If so, then what might be the estimated value of the shares acquired? Options having vested doesn't necessarily mean they possess value, merely that they may be exercised. Or did you mean the estimated intrinsic value of those options (estimated value less exercise cost) is $100,000? Speaking from my own experience, I'd like to address just the first part of your question: Have you treated this as you would a serious investment in any other company? That is, have you or your brother-in-law reviewed the company's financial statements for the last few years? Other than hearing from people with a vested interest (quite literally!) to pump up the stock with talk around the office, how do you know the company is: BTW, as an option holder only, your brother-in-law's rights to financial information may be limited. Will the company share these details anyway? Or, if he exercised at least one option to become a bona-fide shareholder, I believe he'd have rights to request the financial statements – but company bylaws vary, and different jurisdictions say different things about what can be restricted. Beyond the financial statements, here are some more things to consider: The worst-case risk you'd need to accept is zero liquidity and complete loss: If there's no eventual buy-out or IPO, the shares may (effectively) be worthless. Even if there is a private market, willing buyers may quickly dry up if company fortunes decline. Contrast this to public stock markets, where there's usually an opportunity to witness deterioration, exit at a loss, and preserve some capital. Of course, with great risk may come great reward. Do your own due diligence and convince yourself through a rigorous analysis — not hopes & dreams — that the investment might be worth the risk." "If we can agree that 2010 was closer to the low of 2009 than 2007 then the rich did all the buying while the super-rich did all the selling. http://www2.ucsc.edu/whorulesamerica/power/wealth.html Looks like the rich cleaned up during the Tech Crash too, but it looks like the poor lost faith. That limited data makes it look like the best investors are the rich. Market makers are only required by the exchanges to provide liquidity, bids & asks.  They aren't required to buy endlessly. In fact, market makers (at least the ones who survive the busts) try to never have a stake in direction.  They do this by holding equal inventories of long and shorts.  They are actually the only people legally allowed to naked short stock: sell without securing shares to borrow.  All us peons must secure borrowed shares before selling short. Also, firms involved in the actual workings of the market like bookies but unlike us peons who make the bets play by different margin rules.  They're allowed to lever through the roof because they take on low risk or near riskless trades and ""positions"" (your broker, clearing agent, etc actually directly ""own"" your financial assets and borrow & lend them like a bank). http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p004001.pdf This is why market makers can be assumed not to load up on shares during a decline; they simply drop the bids & asks as their bids are hit." The drawback is not knowing when prices have reached a level where you are comfortable getting back in.   Someone who got out at S&P 1500 before the crash of '08 was very happy. But did they get back in at 666 or just watch the market come back 3X from that level? The S&P returned 10.46% from Jan '87 till Dec '14. I wonder how many traders got in and out just right to beat that number? Bottom line is that even the pro's acknowledge that timing the market is basically impossible, so why try? There are multiple factors at play that drive stock price movements, but one that can be visualized is that stocks can be priced relative to other (similar stocks).  When one stock price goes up without fundamental changes (i.e. daily market noise/movements), it becomes slightly more expensive relative to it's peers.  Opportunists will sell the now slightly more expensive stock, while others may buying the slightly cheaper (relatively) peer stock.    Imagine millions of transactions like this happening throughout each hour, downward selling pressure on a stock that rises too fast in value relative to it's peers or the market, and upward buying pressure on stocks that are relatively cheaper than it's peers.  It pushes two stocks towards an equilibrium that is directionally the same.    Another way to think of it is lets say tomorrow there is $10B in net new dollars moved into buy orders for stocks that comes from net selling of bonds (this is also partly why bonds/stocks are generally inversely related).  That money goes to buys stocks ABC, XYZ, EFG.  As the price of those goes up with more buying pressure, stocks JKL, MNO, PQR are relatively a tad cheaper, so some money starts to flow into there.  Repeat until you get a large majority of the stocks that buyers are willing to buy and you can see why stocks move in the same direction a lot of times. While there are lots of really plausible explanations for why the market moves a certain way on a certain day, no one really knows for sure.  In order to do that, you would need to understand the 'minds' of all the market players.  These days many of these players are secret proprietary algorithms.  I'm not quibbling with the specifics of these explanations (I have no better) just pointing out that these are just really hypotheses and if the market starts following different patterns, they will be tossed into the dust bin of 'old thinking'. I think the best thing you can explain to your son is that the stock market is basically a gigantic highly complex poker game.  The daily gyrations of the market are about individuals trying to predict where the herd is going to go next and then after that and then after that etc. If you want to help him understand the market, I suggest two things.  The first is to find or create a simple market game and play it with him.  The other would be to teach him about how bonds are priced and why prices move the way they do.  I know this might sound weird and most people think bonds are esoteric but there are bonds have a much simpler pricing model based on fundamental financial logic.  It's much easier then to get your head around the moves of the bond markets because the part of the price based on beliefs is much more limited (i.e. will the company be able pay & where are rates going.)  Once you have that understanding, you can start thinking about the different ways stocks can be valued (there are many) and what the market movements mean about how people are valuing different companies. With regard to this specific situation, here's a different take on it from the 'priced in' explanation which isn't really different but might make more sense to your son: Pretend for a second that at some point these stocks did move seasonally.  In the late fall and winter when sales went up, the stock price increased in kind.  So some smart people see this happening every year and realize that if they bought these stocks in the summer, they would get them cheap and then sell them off when they go up.  More and more people are doing this and making easy money.  So many people are doing it that the stock starts to rise in the Summer now.  People now see that if they want to get in before everyone else, they need to buy earlier in the Spring.  Now the prices start rising in the Spring.  People start buying in the beginning of the year... You can see where this is going, right?  Essentially, a strategy to take advantage of well known seasonal patterns is unstable.  You can't profit off of the seasonal changes unless everyone else in the market is too stupid to see that you are simply anticipating their moves and react accordingly. Because it's barely reported and when it is most people don't understand some of the fundamental principles of finance to grasp the implications of it all.   It's not their fault really.   You can blame a man for a lack of wanting to be educated or no concern for intellectual curiosity but you can't for just being plainly uneducated.