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Stock Market and great depression

Stock Market and great depression

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Published by Rahul
Stock Market and great depression
Stock Market and great depression

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Published by: Rahul on Nov 15, 2009
Copyright:Attribution Non-commercial


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Market crash. Just the sound of the phrase makes most people shudder. Butwhat exactly is a crash, and why do they occur? The answer lies within humanpsychology.People love bull markets. Bull markets have the uncanny ability to change thecollective attitude of society. Eventually the euphoria changes into downrightpessimism as the inevitable market crash occurs. Later on, the cycle repeatsitself. In order to fully understand these events, we must learn about behavioralfinance.In financial markets, the majority is always wrong. When the investing majority or the crowd is overly bearish, this is the best time to be buying stocks. When thecrowd is overly exuberant, this is the time to be selling stocks. The financialmarkets work in this ironic way because not everyone can win in the market. If itwere possible for everyone to win in the markets, this would mean that money isbeing created from nothing. The creation of money, in this manner, is impossible.Therefore the markets are a zero-sum game. Zero-sum means that for everywinner, there is a loser. The winner takes the losers money. Zero-sum games aregames where the amount of winnable goods is fixed.
The bottom of the market starts at a time when the stock market is weak and thegeneral population is pessimistic. At this point most investors sell after havingendured a long and torturous bear market. This extreme pessimism found at abottom is always irrational and undeserved. Now the market is undervalued andis a bargain. Savvy investors, the smart money, buy bargain stocks knowing thatthey will be able to sell them higher in the near future. Smart money buying,called accumulation, causes stocks to rise. Rising stocks eventually gain the respect of mutual funds, as billions of dollars of capital is introduced into the market place. Mutual fund investment causes thestock market to advance in a powerful manner. Much of the steady large trendsare powered by mutual funds and other institutional investors. After the stockmarket has gained, stocks are now fairly valued and are no longer consideredbargains. The smart money is now sitting on a large profit, as well. The averageinvestor is still skeptical, however.As bull market events unfold, retail investors begin to take interest in stocks.Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often makeinvestment decisions based on what they read in financial magazines, from their 
brokers and from tips from friends. As the flood of retail capital is invested, themarket soars, causing great euphoria. At this point in the cycle, many companiesbecome public, or launch an IPO. Companies go public when investor sentimentis most optimistic so as to gain the highest possible stock price. IPOs generateeven more optimism as unsophisticated investors buy into the fallacious thoughtsof instant riches. Now is the time when many small investors become wealthy. Inthis phase, stocks are doubling and tripling as the media cheers on theadvancing bull market.At this point, the smart money sells, or distributes, the now overvalued stocks tooverconfident retail investors. The smart money knows that overvalued stocksare no longer worthy investments, and will soon drop in value. Widespread greedalways occurs, in some form, at stock market tops. Sometimes this greed takesform as accounting fraud where companies over inflate their values. Other timescompanies make unrealistic promises, such as dot com stocks without anyearnings. These immoral activities can take place because irrational retailinvestors will buy a stock simply because it is glamorous.
After mutual funds and retail investors are fully invested, the market isoverbought. This means that there is no more cash to fuel the rally. The marketcan only go in one direction down. All it takes is just a hint of negative news andthe market collapses under its own weight. Investors quickly realize the market ismade of smoke and mirrors, as frauds or other abuses come to light. When panic selling starts, a market will always fall quicker than it had risen.Oftentimes, as everyone heads for the exit at the same time, there isnt anyonewilling to buy the stock. This can be especially disastrous for margin users asthey grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors dont sell even as themarket is plummeting. This crowd keeps holding on to stocks in hopes that themarket will recover. As the market plummets 25%, then 50% the average retailinvestor foolishly holds on, in complete denial that the bull market is over. Finallyretail investors sell every stock they own plummeting the market even further.This mass exodus is called capitulation.
It is at this point that stocks are undervalued once again. The smart money isaccumulating and stocks rise. The majority of retail investors bought at the topand sold at the very bottom. This is the very essence of the dumb money. Theyare perpetually late into the game. This cycle continues over and over. Only thesmart investors actually buys low and sells high.
Why BULL and BEAR as market symbols?

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