• creativesoul
    7.9k
    What determines the huge drop in value?

    In this current dramatic drop, the explanation is often that everyone is dumping stocks... everyone is selling. But, I'm confused here... there cannot be a seller without a buyer, and if someone is buying all the shares being sold, then how are they losing value? What difference does it make how many shares are being sold/bought, so long as they are? How does more selling and buying result in an overall drop in value?

    Are the shares being sold at discount prices; below the current stock value? If not, then what reason is there for the value to drop?

    Someone please explain this to me.
  • Wayfarer
    9.5k
    It's a market.There are buyers, but shares are changing hands at much lower prices due to the loss of confidence and the fear of economic downturn. What determines the value of shares is a dark art but the bottom line is that they reflect the company's perceived value in terms of current sales and prospects.

    One of the factors is that the stock market has been inflated by the injection of 'cheap money' as a consequence of very low interest rate regime which has held sway since the 2008 crisis. This has arguably resulted in a massive bubble or over-valuation of stocks, which has now been thoroughly deflated by the appearance of a global pandemic. This pandemic is going to have huge economic consequences with many businesses, large and small, collapsing or going into hibernation, and possibly millions of jobs lost.


    Other than that, in this age of google, have a look for some stock market primers.
  • StreetlightX
    4.9k
    What difference does it make how many shares are being sold/bought, so long as they are?creativesoul

    What matters is the price that they are being bought and sold at. People are still buying, but they are buying at lower and lower prices. Reciprocally, sellers are selling at lower prices too (because buyers are only willing to buy at low prices). It's not the volume or rate of shares traded ('more buying and selling') that makes the difference, but how much people are willing to pay to acquire stocks.

    The rough reason they are dropping is that people are worried about the profitability of the companies they hold shares in, which is dropping across the board because are people no longer spending money on things (like flights, entertainment, retail, etc). People not spending money = no profits. No profits = no return on investments in stocks = better to unload (sell) those stocks.

    The other rough reason is the self-fulfilling one that if others sell, then stock value drops, so you have to sell too in order not lose money on your investment. Example: if you bought a stock at $100, and it's now selling for $40 and the price is falling, you've made a 'paper' loss of $60, and you risk losing even more by holding onto the stock. Better to 'get out' and take the real loss now rather than wait for it to fall further and make a bigger loss down the track. The big problem is that if everyone thinks like this, everyone sells, and you get a reinforcing cycle of panic selling which drives the stock prices down sheerly because everyone is worried about everyone else selling - and therefore sells.
  • Shawn
    10.4k
    Whatever happened to arbitraging in the market?
  • tim wood
    4.1k
    Not-so-easy in a digital world. I'm assuming you know what that is.
  • Shawn
    10.4k


    You assume way too much. Arbitraging a trade ensures no market bubbles. But, go figure.
  • Nobeernolife
    556
    In this current dramatic drop, the explanation is often that everyone is dumping stocks... everyone is selling. But, I'm confused here... there cannot be a seller without a buyer, and if someone is buying all the shares being sold, then how are they losing value?creativesoul

    Because they still have PRICE even if nobody is buying. If you own stocks (or anything else) in such a market, you can see the price drop all the time, while you are sitting on your goods.
  • creativesoul
    7.9k
    What determines the huge drop in value?

    In this current dramatic drop, the explanation is often that everyone is dumping stocks... everyone is selling. But, I'm confused here... there cannot be a seller without a buyer, and if someone is buying all the shares being sold, then how are they losing value? What difference does it make how many shares are being sold/bought, so long as they are? How does more selling and buying result in an overall drop in value?

    Are the shares being sold at discount prices; below the current stock value? If not, then what reason is there for the value to drop?

    Someone please explain this to me.
    creativesoul


    It's a market.There are buyers, but shares are changing hands at much lower prices due to the loss of confidence and the fear of economic downturn. What determines the value of shares is a dark art but the bottom line is that they reflect the company's perceived value in terms of current sales and prospects.Wayfarer

    Hey Jeep!

    I'm remain hesitant to use the notion of 'dark art'. However, there is something very suspicious about it all.



    One of the factors is that the stock market has been inflated by the injection of 'cheap money' as a consequence of very low interest rate regime which has held sway since the 2008 crisis. This has arguably resulted in a massive bubble or over-valuation of stocks, which has now been thoroughly deflated by the appearance of a global pandemic. This pandemic is going to have huge economic consequences with many businesses, large and small, collapsing or going into hibernation, and possibly millions of jobs lost.Wayfarer

    Yeah, I appreciate the view you're presenting here but there's nothing about it that answers the direct questions I'm on about. Seems might be able to give me some answers that I'm looking for.
  • Benkei
    2.7k


    Tim, it is easier to arbitrage in a digital world because price information is more readily accessible.

    Shawn, arbitrage does nothing for bubbles. Bubbles are structural imbalances in the market and arbitrage only ensures price differentials (which can exist through correlation not just dual listings) are closed. High speed traders do nothing else and they're having a field day in such a volatile market.

    Virtu, Citadel, IMC, Optiver, Flow Traders are all interesting stock at the moment because of it.
  • creativesoul
    7.9k
    What difference does it make how many shares are being sold/bought, so long as they are?
    — creativesoul

    What matters is the price that they are being bought and sold at.
    StreetlightX

    Right. That's what I'm asking about, but I'm not asking for generalities. I have a strong interest in this.

    What and/or who determines the selling price?

    In the world that I live in the seller does that, and only drops the purchase/sales price if they see fit for whatever reason. That reason is never ever to intentionally reduce profitability or consumer confidence. That reason is never to sell my product as a means to render my customer at a financial loss.

    That would be a public disservice.

    In the world I live in, the seller cannot buy back half of their own product(half of what they've recently sold) in order to use that sales information(including the higher sales price) as a tool for convincing potential buyers to believe that the value of the product is higher than it is. This creates an illusion of more customer/consumer demand than there actually is.

    That is a deliberate deception. Fraud. A public disservice.

    Colonel Sanders cannot buy back my bucket of chicken as well as all my neighbors' for a dollar more than we paid, and then go on to use that information to convince us and others that there has been an increase in the value of the bucket of chicken, based upon an increase in sales(demand) only then to sell it back to us for more.





    People are still buying, but they are buying at lower and lower prices. Reciprocally, sellers are selling at lower prices too. It's not the volume or rate of shares traded ('more buying and selling') that makes the difference, but how much people are will to pay and to acquire stocks.StreetlightX

    You make it sound as if the buyer is driving and/or establishing the actual share(selling) price. Is that a misreading?




    The rough reason they are dropping is that people are worried about the profitability of the companies they hold shares in, which is dropping across the board because are people no longer spending money on things (like flights, entertainment, retail, etc). People not spending money = no profits. No profits = no return on investments in stocks = better to unload (sell) those stocks.

    Someone is spending money, because someone is buying the stocks at a discounted price. What I want to know is who what when where and how is the market price set to begin with?

    How can so many people be selling if there are no buyers. There cannot, and unless I'm mistaken, a seller does not have to sell at a discounted price...

    So, it all started somewhere and snowballed. Who first began dumping huge numbers of shares at a lower price, and who is buying them? Is this a matter of public record?


    Bubbles are structural imbalances in the market...Benkei

    That's putting it mildly...
  • Wayfarer
    9.5k
    What and/or who determines the selling price?creativesoul

    IT'S A MARKET. The selling price is determined by what people will pay. Hope that's direct enough for you.
  • StreetlightX
    4.9k
    How can so many people be selling if there are no buyers.creativesoul

    There are buyers. The price of a stock indicates the last price at which a stock was traded at (the last time a buyer and seller 'agreed' on a price). Stop thinking in terms of 'dsicounted price': there is no 'discounted price', just the price, that's it. It just happens to be low (in relation to where it was in the past).

    You make it sound as if the buyer is driving and/or establishing the actual share(selling) price. Is that a misreading?creativesoul

    Not a misreading, that's exactly right. Or at least it is in this case, where it's a buyer's market. Again, it's just supply and demand dude: there's alot more supply than there is demand, so the price falls. Economics 101.
  • Benkei
    2.7k
    What and/or who determines the selling price?

    In the world that I live in the seller does that, and only drops the purchase/sales price if they see fit for whatever reason. That reason is never ever to intentionally reduce profitability or consumer confidence. That reason is never to sell my product as a means to render my customer at a financial loss.
    creativesoul

    All sellers and buyers make a market. They all put in orders to buy or sell at a certain price. The price you see on the stock market is the last price at which a buyer and seller meet (eg. they put in orders for the same price).

    Sellers will be willing to sell at lower and lower prices because of expectations of either market sentiment or performance of the underlying company. (this doesn't concern bonds obviously, which is in some ways more complicated and in others simpler).

    In uncertain times a lot of investors like to invest in more stable investments and are prepared to "take a loss". They end up buying gold and AAA-rated government bonds (hooray for Germany and the Netherlands).
  • creativesoul
    7.9k


    So, it all started somewhere and snowballed. Who first began dumping huge numbers of shares at a lower price, and who is buying them? Is this a matter of public record?

    :brow:
  • StreetlightX
    4.9k
    Is this a matter of public record?creativesoul

    No, but it doesn't particularly matter. This isn't some grand conspiracy. Economic conditions are shit right now, which means alot of people will be looking to sell their shares.
  • creativesoul
    7.9k
    In uncertain times a lot of investors like to invest in more stable investments and are prepared to "take a loss".Benkei

    So... hypothetically, such an investor could sell off all his airline stock at a lower price than the current market value, or would those lower prices be the new share price?
  • creativesoul
    7.9k
    No, but it doesn't particularly matter. This isn't some grand conspiracy.StreetlightX

    It doesn't seem like some grand conspiracy to me either. Just many nefarious agents all doing what's allowed. I'm just attempting to get some questions answered.

    If it is not a matter of public record, then what's stopping a corporation from buying back most of it's own stock at a higher price for the sole purpose of convincing others that it's value has increased?
  • Wayfarer
    9.5k
    Is this a matter of public record?creativesoul

    of course it is. Shares are traded in public companies and every transaction is a matter of public record.

    If you watch movies, try The Big Short, or Wall Street. Plenty of insights into Wall St shenanigans in both.
  • Wayfarer
    9.5k
    BTW, the share market (and modern banking and insurance) were all the product of the Spice Trade. It was the British and Dutch trading companies - they worked out how to sell shares to finance their flotillas to go to the Spice Islands and bring back spices. Read a fascinating book about it a few years back, which of course I’ve mostly forgotten.
  • boethius
    518
    So, it all started somewhere and snowballed. Who first began dumping huge numbers of shares at a lower price, and who is buying them? Is this a matter of public record?creativesoul

    The "police of the market" like the SEC in the US can investigate if things seem manipulated. Such as lots of shares being dumped before a big announcement usually indicates insider trading.

    In principle, all the transactions and accounts can be traced, but in practice sometimes it is too complicated to figure out (as anonymous offshore "businesses" can also buy and sell stocks).

    However, in this case the crash is not some algorithm gone haywire or just "mass hysteria".

    Well, there is mass hysteria, but good reason for it. (The world won't end or go "madmax" but problems are not binary between "nothing to worry about" and "now I have to learn to to play a flame thrower guitar").

    The reason for the crash is that the lockdown of entire economies has massive implications for the stocks of most industries. To take one sector, tourism, it's clearly not going to making much profits over the short to medium term.

    You may say, well "it's temporary", things will get back to normal.

    First, even if that's true, all stocks primarily related to the tourism industry are (all else being equal) worth less because they will be making less profits. A business that skips out on a year of profit is simply worth less than had it been able to pocket that year of profits. So even in the though experiment of "putting a business on pause" and then going back to normal after some time, that business is still worth less and we may expect the stock to trade lower.

    Second, the disruption of the pandemic is so severe that the assumption that things will ever go back to normal is tenuous. Tourism may simply never get back to the level it was before because people change their habits during these travel restrictions, and, more importantly, due to the entire market being disrupted people will have less money to do tourism (what money they have they may also say ... hmm, black swan events to happen, I'm going to hold on to this money).

    So... hypothetically, such an investor could sell off all his airline stock at a lower price than the current market value, or would those lower prices be the new share price?creativesoul

    Essentially yes. In practice, a offering to buy or sell shares has to be "big enough" to move the market.

    If someone is offering to sell 1 million shares at a certain price, if you then offer 1 share below that price it will, usually, just disappear and it's not noticeable as a share price move.

    Keep in mind, that the listed price does not mean someone is buying or selling, only that there is (usually a substantial) offer at that price.

    If no one buys at 90 dollars all or part of an offer of 1 million shares, then the seller may move their offer lower to 89 dollars. It's only when those million shares actually trade hands that we can say "that's the new value according to the stock market"; and it's not "all or nothing", someone may think 90 dollars is a good price and will sell quickly, but they only want to buy 10%, then if it goes lower they will say to themselves "well, should have waited"; of course, it's easier to say "buy low and sell high" than actually do so.

    So, people wanting to sell stock may need to "march their price" down until someone buys. If this process takes an hour for sellers to test each price point on the way down, then it seems the stock went down over an hour; however, there was no one actually buying at all those price points. Seller A sets a price, no one buys, seller B is willing to sell at a lower price, no one buys, seller C offers an even lower price, seller A sees this and really wants to sell so sets an even lower price. In age of electronic algorithms this process can be very quick, which is why you can have huge drops essentially instant.
  • StreetlightX
    4.9k
    what's stopping a corporation from buying back most of it's own stock at a higher price for the sole purpose of convincing others that it's value has increased?creativesoul

    Nothing. Share buybacks are a thing.

    That all said, depending on one's area of jurisdiction, there can be and are certain rules regarding the transparency of shareholder ownership, which usually come into effect at certain thresholds of ownership. Lots of ways around this through - shell holdings and so on.
  • Wayfarer
    9.5k
    I’m telling ya, watch this:

  • Benkei
    2.7k
    So... hypothetically, such an investor could sell off all his airline stock at a lower price than the current market value, or would those lower prices be the new share price?creativesoul

    Why would he sell at a lower price than the at market price? But yes, depending on the stock exchange rules either the highest bid price will be the new share price (and conversely the seller would receive a higher price than he asked) or it is settled at the low price of the seller.
  • boethius
    518
    Now that the important philosophical subject of how trades are executed on stock exchanges has been investigated, I propose we move onto the general topic of corona virus and the stock market.

    My understanding of the situation is as follows:
    1. Corona is causing massive disruptions to most sectors of the economy: collapse of air travel and tourism for an unknown time, closing of local restaurant and entertainment and every other "in person" businesses for an extended period, many old people dying which will put more homes on the market, disruptions to supply chains due to manufacturing shutdowns in China, and long term psychological based changes in behaviour, damage to health systems (mainly skills dying or being so traumatized that they quit during or afterwards), and all related supply industries.
    2. The positions taken by central banks to paper-over the 2009 "great recession" have not been unwound.
    3. There are no more tools available (nor the prospect of until now "unthought of" tools) that can encourage traders to believe the free market will be stabilized by collectivists schemes of one form or another.
    4. Therefore, any market actions by regulators of central banks will simply encourage people in the know to use those actions to get out even faster (not anticipate those actions will actually work and therefore stay in).
    5. Large businesses will be bailed out anyways, even if long term structural changes to the economy mean there are no viable paths back to profitability.
    6. Large sectors of the US economy, such as the fracking industry, have essentially never turned a profit and are faced with an economic down turn and a Russia and Saudi price reduction to force them into bankruptcy. Bailing the fracking industry out cannot even be imagined to make sense; they may actually be left hanging due to problems elsewhere being simply too great for friends to look after each other. (but this is an analytic side-quest to maximize one's schadenfreude at the expense of fracking executives and investors, and yes, a little bit at the expense of fracking workers too; but of course, doesn't help the financial system to have a giant rotten lemon on their desks as no one drinks rotten lemonade, except the fed of course)
    7. Therefore, the central banks and regulators, by monetizing one way or another, trillions in losses will cash-up the investor class and be left holding what is technically referred to as "a big bag of dog shit".
    8. This cash reentering the market when things are stabilized will cause massive inflation of whatever good assets remain.
    9. There are no policy tools left (I am of aware of anyways) that could counter-act this inflation (US is already in trillion dollar deficit, 1.5 trillion "plausible deniability bailout" is already started in first week of this crisis and there will be much more, interest rates are zero or negative, the deficit will go even higher, and the fed will stop reporting on their financial alchemy projects).
    10. We can reasonably conclude that inflation therefore will not be controlled (i.e. controlled less than the current policy mechanisms as well as just changing the definition of "what people need" on the fly).
    11. International trade will start to collapse back to "real assets" (do you have something tangible I want, do I have something tangible that you want), rather than the previous regime of debt based trade (well, debts haven't been a problem before, therefore I will continue to pretend they will never be a problem in the future).
    12. Referring back to tangible assets will be a radical simplification of the current trade system (not clear if there will be markets for most of the crap currently produced).
    13. Regulators will realize at this point that there is no way to reboot the system without even more inflation since they just gave most of the money to the wealthy ... and have been doing so for the last decade already (and trickle down theories obviously make no sense, so the money will sit there but ready to pounce on any assets that do start to go up in price if the governments do try to bailout the poor through small "throw them a bone" inadequate measures, as horrifying as that sounds they will be forced to face their deepest fears of needing to throw those bones).
    14. Service economies will collapse as credit dries up. Manufacturing will radically simplify, but countries with modest manufacturing capacity will be forced to protect their manufacturing due to over-capacity of larger manufacturing centers trying to shift production to "anything and everything that is still being bought somewhere"; the interdependence of manufacturing economies will make such policy shifts acrimonious and volatile.
    15. Bottom line: isolationism as we saw in the great depression is now unavoidable, with all tools in the policy shed hemmed in and blunted by inflation.
    16. World War would be great to just nationalize whole manufacturing bases and get people jobs in the business of killing people and use the nationalist furor to crush socialist agitation that's trying to help the poor, but nuclear weapons render this no longer "the go to" easy solution for capitalism's woes. It will still be tried, of course, using conflicts to get people focused on something else, but with unknown efficacy / survival of the human species.
    17. The only solution will be a UBI, after a currency re-issue wiping out all that money held by the investor class (and all the debts held by everyone else). A UBI works because manufacturing technology has incredibly high efficiency today; you can just reset the currency domestically, issue a UBI and people will sort out how to make what people actually need (though resulting in a very different looking economy as people may change their life goals if they can relax about their short term survival). Countries that already have a well-fare state already have the institutions to keep things stable throughout the transition (most essentials are already organized by the state, staffed with dedicated public servants, and can continue to function without much reorganization). Renewable energy means there is no core-dependence on unfriendly parties to sell you oil, and therefore no need for major countries to go to war to secure critical resources, and no need for smaller countries to accept "free-market" destruction of their manufacturing base in exchange for access to oil. The unmitigated incompetence of the technocratic neo-liberal governing order, as demonstrated in this crisis, will make the propaganda needed to keep this power structure in place ineffective. People who can think critically and care about the poor have therefore a much easier time to get into power and immediately bailout the poor in what amounts to, one way or another, a UBI and currency reset collectivist enterprise. Investor class will try to prevent this from happening (and may succeed by killing everyone) but, as they are already on the back foot in their propaganda at the moment, I believe it is more probable we will be seeing, in essence, Marx's core predictions come true: Capitalists undermining their own basis of power due to "the greed horizon" becoming too short, such as causing this crisis by trying to avoid a much smaller dip in airline stocks literally just 2 months ago, and people taking control of the means of production to satisfy their own needs through equal political participation.
  • Nobeernolife
    556
    Keep in mind, that the listed price does not mean someone is buying or selling, only that there is (usually a substantial) offer at that price.boethius

    Exactly. Some people here do not seem to understand that. A "price" for a stock does not mean that anybody is actually buying or selling. Anybody who has owned stocks and try to sell them in a downturn like this has had this experience.
  • ssu
    2.4k
    What determines the huge drop in value?creativesoul
    That the Global economy goes into a sudden recession.

    Trump has already hinted that now the US economy is going to recession. Here the are making forecasts of a -5% GDP growth.

    Markets price in this. And let's see if this is a huge buying opportunity or if that is in the summer.
  • Metaphysician Undercover
    6.8k
    What and/or who determines the selling price?creativesoul

    The selling price is determined by what people are willing to pay. it's a simple matter of supply and demand. Sellers are plentiful, buyers are not, prices drop. The sellers are motivated for numerous reasons, to cover margins (loans), or whatever, and the buyers are not. There are times of year, where the markets are more vulnerable due to predictable expenses, like income tax payment in the spring, people need cash.

    or would those lower prices be the new share price?creativesoul

    Right, the share price reflects the last sale.

    There are many ways to make money from buying and selling stock. Some actually contribute to the market drop. Check out short selling. In this practise, you take advantage of the period of time which you have to settle your transaction. You can sell stock which you do not presently own, and buy it at a later time, for a lower price. Your time is limited, so it's extremely risky, but if the market is in free fall one might reap significant rewards in that short period of time. Strategic short selling can actually induce a market drop by providing an abundance of stock for sale (large lots) creating significant drops, margin calls (demands to pay up debt as collateral vanishes), and general panic, while buying back in dribs and drabs to cover what has been sold. Don't underestimate conspiracy within the market place. Prostitution might be the oldest known sin, but conspiracy remains unrevealed and therefore might be even older.
  • tim wood
    4.1k
    Tim, it is easier to arbitrage in a digital world because price information is more readily accessible.Benkei
    I have read that the price world moves so fast that a premium is paid for real estate closer to the market - presumably the NYSE - so that trades orders will not be horribly delayed by the time it takes a digital signal to travel an extra few miles. And for similar reasons, money is spent on computer cables and computer configurations that will minimize the length of those cables - so that computers will work that much faster. That's not a world I live in, nor could live in. I should not have said easier; I should have said impossible for most folks.
  • unenlightened
    4.4k
    It's not that we're ignoring you, it's that your analysis is crystal clear and unanswerable.
  • Benkei
    2.7k
    There are no more tools available (nor the prospect of until now "unthought of" tools) that can encourage traders to believe the free market will be stabilized by collectivists schemes of one form or another.boethius

    There are plenty of tools available. The problem is that solutions are based on stochastic models for a global economy that is too complex to be caught in such models. So the cure doesn't cure or creates a lot of unwanted side effects.
  • boethius
    518
    There are plenty of tools available. The problem is that solutions are based on stochastic models for a global economy that is too complex to be caught in such models. So the cure doesn't cure or creates a lot of unwanted side effects.Benkei

    Here I am mainly referring to financial institutions like the central banks.

    I.e. no more tools that can work in the existing paradigm to maintain it's central aspects (i.e. get back to "normal").

    Of course, the solution I propose, UBI, is obviously a tool, but it's legislative and a fundamental departure from the current paradigm.

    I'm not sure if we disagree here; do you mean to say if central banks had "better models" that they could get the economy back on track (as they would understand that track to be)?
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