Help me understand the stock market

In my half year of economics in high school, we learned that the way to make money in the stock market is to buy when a stock is cheap and either hang onto it and collect dividends or sell it when the price goes higher. So I have two questions for those more experienced.
First- Why are people selling now that prices are going down? Why sell something that’s worth less now than before? I can understand getting out of something that looks like it’s going to stop operating as a business, but why sell stock in a stable company and take a loss?
Second- Why are people not buying now that prices are down? There are still people with lots of spare money- alas, nobody I know, but still. Unless you think that the government and the fiat money system are going down the tubes, the stock market is going to go back up at some point, and the cheap stocks now will go up, too. It seems like an opportunity, not a disaster.
What am I missing?

  1. October is a volatile month. Many large funds rebalance their portfolios this time of year.

  2. Some selling is being done because of margin calls. People who bought stocks on margin are forced to sell some of them because of the drop in the value of their portfolios.

  3. A lot of people are listening to the doom and gloom pundits on tv. They are selling everything and putting their money into CDs or other ‘safe’ investments. Many people buy high and sell low.

You’ve got the right idea. It’s like a roller coaster–don’t get off while it’s moving and you won’t get hurt.

I don’t know anybody who’s selling right now because as you said, that’d be dumb. Most people who are crying about their retirement taking a dive are only seeing a paper loss–they’ve still got the same number of shares and by the time they actually retire they’ll be swimming in gravy once again. The only reason I can see for people not buying right now is that they’re not certain which corporations are going to die. Even so, they could look to a mutual fund for a bit more security. And then there’s always the question, “Is this the bottom yet?” But yeah, “Stocks are on sale” for a little bit longer.

Oh, and if nobody’s selling any of the fixed number of stock shares, it stands to reason that nobody’s going to be able to buy.

Discipline & Dedication. If you can’t muster these, then stay out of the market.

Many reasons.

People sell stocks that are going down in order to cut their losses (there are also some types of investing where you profit when a stock goes down, but they only account for a small part of the trading). You may have lost money, but you won’t continue to lose it.

In addition, even if a stock is down from a high point, you may make money selling it (if you bought it at 10, and it went up to 50, selling at 40 isn’t a bad investment).

Companies tend to reflect the economy, and there are some that do well in a poor economy. If you sell your stock in a company that does well in good times and move the money to one that does well in bad times, your money is better placed.

People are buying because they figure the stock will go up and that eventually will make money. They could be wrong, of course.

The real action isn’t with retail investors.

There are lots of organizations, funds, corporations, etc, which bought stock using borrowed money. The loan is now due & they can’t get a fresh loan to repay the old one. So they are forced to sell the shares for whatever price they can get. that’s the source of the selling.

Meanwhile, there are some other organizations which might buy, but see what is going on and are going to wait for prices to fall even further.

If you think, say, Boeing is a bargain at $45, imagine how much better a bargain at, say, $25.

As well, a lot of those would-be organizational buyers have been using borrowed money for years. They too are suddenly finding it hard to borrow to buy. And that’s the main reason for a realtive shortage of buyers.

The reason Warren Buffett is buying when others aren’t is more a matter of he has the available cash & they don’t, rather than he has the desire & they don’t.
It gets really dangerous when you consider that the more prices decline, the more the leveraged shoreowners have to dump shares to pay their debts regardless of the availability of buyers. And the more stocks fall, the more buyers get the idea to wait a little longer. The sum is the buyer/seller ratio gets further out of whack & prices enter free fall.

I know two. My aunt, who is around 60, sold out of the market because she’s actually about to retire & needs the reliable cash flow of more stable investments–she doesn’t have time to wait for the market to rebound. And my sister-in-law, who’s around 40, sold out because … well, I guess she just panicked. :rolleyes:

And according to today’s Wall Street Journalthey aren’t alone.

Personally, I just diverted some of my money-market funds into a stock fund. But there are a lot of people who are convinced the market will get worse before it gets better, and they want to cut their losses.

Two things to remember:

  1. The stock market is no place for the faint of heart
  2. Never bet more than you can afford to lose.

Well, if it’s such a sure thing, have you put your money where your mouth is and bought up lots of stocks? Why not?

Many people think that stocks are still overpriced and are waiting for prices to drop to a level that makes them attractive investments. Making things worse is the uncertainty about the future. Forget about profits and return on investment, will the company even survive the recession?

Presumably because not all stocks will go up, and probably because they’ll continue to go down a bit first.

There are a couple of pretty obvious reasons people might be wary of buying right now.

One reason is that it’s hard to tell where the bottom is, and everyone wants to buy at the bottom. The dow is down to about 8300 from recently being at 11500. But, people think, what if this is just the beginning of an even bigger drop down to, say, 6000? They want to wait and see. I don’t like to stress about that kind of stuff. I take the attitude that prices right now are pretty damn good and I’m going to try not to kick myself too hard if I buy and prices get even better.

The other reason is that people don’t have that much extra cash that it’s ok to dump into the market. I keep a little cash in my investment account, and used a good portion of it a couple weeks ago to buy after the large drop, but it’s really small potatoes compared to what I’d like to be buying. Hmm, where could I get more cash? Oh, I could sell some stocks, except that they’re all in the crapper right now. I have more short-term money in CD’s that mature every month, but that’s not a huge amount either. I’m considering using a bit of that money at the end of this month. However, there’s a big scary downside to consider: I don’t want to spend all my readily available money on the fire sale, because the worst case scenario is that the economy sucks long enough that I lose my job and have to actually start living off that cash before the market comes back up. So I reserve a little buffer to live off of while I hold my breath wait the downturn out. If the market is then down long enough for me to burn through my buffer, things get really ugly and I’m forced to start selling my long-term investments at fire sale prices in order to make ends meet. Which is very bad.

I have not, because I haven’t been able to find a job since last November and we’re barely scraping by on my husband’s paycheck. If I did have the money to spare, heck yes I’d be buying now.

I don’t know anybody who is panic selling, but clearly lots of people are doing just that. They are reading the stories about a world-wide recession and want to have there money somewhere where it’s guaranteed not to go down in value. Many people started investing over the past few years and didn’t realize that there are bull AND bear markets.

If history tells us anything it’s that the US stock market will go up and down over time, but in the long run is a wise place to invest your extra money. You shouldn’t be investing money you need to live on. The long term may be 20 or 30 years, so most of us are in a "buy and hold’ posture meaning that while we have lost 30-40% of the value of our portfolios over the past few months it’s only a paper loss and until we actually sell we haven’t lost anything yet.

If all of my money was tied up in a few companies that may not survive a protracted world-wide recession I would probably start selling them too…

Some people feel that what they hold will be worth even less in the future, and it is better to cut one’s losses now. Others may feel that there are better investment opportunities than what they hold currently, so they sell their current holdings to free up the cash to invest in those other opportunities. Still others panic sell. Lots of potential reasons exist.

There is a great deal of economic uncertainty and it’s not clear that stocks are in fact cheap right now. True, stock prices are down, but corporate earnings are down sharply and future earnings forecasts are looking weak as well. Since future earnings are a key component of a company’s value, this depresses the company’s present value and its associated stock. Even if you consider only the stock of solid, stable companies, the economic recovery process may wind up being so long and drawn out that, in hindsight, you may have been better off investing in other assets types.

To quote Mark Twain:
“October is a dangerous month to speculate in stocks. Other dangerous months are: November, December, January, February, March, April, may, June, July, August and September”.

These questions seem to betray a common misconception of the stock market, that there are more sellers when the price is low, and more buyers when the price is high, when, actually, the volume of sales is (mostly) independent of the prices. People are buying now, as much as others are selling.

Every transaction has both a seller and a buyer, so there are always exactly as many stocks sold as bought. You have to sell a stock to someone, and that someone is buying it.

Now, when people think about there being “too many sellers” or “too many buyers”, they really mean “too many at a particular price”. When there are more buyers at a given price than sellers, the price goes up, vice versa, down.

So, why would there be more or fewer buyers at a given price? Because the stock isn’t worth as much. Maybe it isn’t worth as much because people think the company will not be able to pay dividends, or will not go up in price. Maybe it isn’t worth as much because it seems more risky (and risk has a real cost). Maybe it isn’t worth as much because fewer people want to spend a lot on stock.

As for why people might be selling now, there are a lot of reasons. Maybe they need the money. Maybe they are trying to time the market, and think it will go down further. Maybe they think that a recovery will take long enough that they’re better off investing elsewhere.

Here is a nice example of the October sells offs of the past.

Getting back to the OP, there’s a saying that every movement goes on longer than it should. The trick is knowing how much longer. I think the time for fear re: US stocks should be over, but it could be years before people start buying again.

FWIW I’m pretty much fully invested, with the exception of my house and my checking account.