Where does the stock go in a collapse?
Just before a crash or at the start of the crash most of the smart money would have gotten out, the remaining technical traders would be out by the time the market has dropped 10 to 15%, and some of them would be shorting their positions by now.  Most long-term buy and hold investors would stick to their guns and stay in for the long haul. Some will start to get nervous and have sleepless nights when the markets have fallen 30%+ and look to get out as well. Others stay in until they cannot stand it anymore. And some will stick it out throughout the downturn. So who are the buyers at this stage? Some are the so called bargain hunters that buy when the market has fallen over 30% (only to sell again when it falls another 20%), or maybe buy more (because they think they are dollar cost averaging and will make a packet when the price goes back up - if and when it does). Some are those with stops covering their short positions, whilst others may be fund managers and individuals looking to rebalance their portfolios. What you have to remember during both an uptrend and a downtrend the price does not move straight up or straight down. If we take the downtrend for instance, it will have lower lows and lower highs (that is the definition of a downtrend). See the chart below of the S&P 500 during the GFC falls.  As you can see just before it really started falling in Jan 08 there was ample opportunity for the smart money and the technical traders to get out of the market as the price drops below the 200 MA and it fails to make a higher peak. As the price falls from Jan 08 to Mar 08 you suddenly start getting some movement upwards. This is the bargain hunters who come into the market thinking the price is a bargain compared to 3 months ago, so they start buying and pushing the price up somewhat for a couple of months before it starts falling again. The reason it falls again is because the people who wanted to sell at the start of the year missed the boat, so are taking the opportunity to sell now that the prices have increased a bit. So you get this battle between the buyers (bulls) and seller (bears), and of course the bears are winning during this downtrend. That is why you see more sharper falls between Aug to Oct 08, and it continues until the lows of Mar 09. In short it has got to do with the phycology of the markets and how people's emotions can make them buy and/or sell at the wrong times. "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."
Thank you for replying. I'm not sure I totally follow though, aren't you totally at mercy of the liquidity in the stock? I guess I'm havinga hard time visualizing the value a human can add as opposed to say vwapping it or something. I can accept that you're right, just having a difficult time picturing it It will be most interesting to see what happens as Oil starts to get traded more in more in other currencies.  In the controlled demolition that was the WTC, you could see the disbelief in peoples faces as the top started to topple and the first few floors pancaked, then the fear as they realized the whole thing was coming down and they started to run.  Feels the same, a controlled demolition, 9.8 m/s^2 all the way down. Free fall "Market makers, traders, and value investors would be who I'd suspect for buying the stock that is declining. Some companies stocks can come down considerably which could make some speculators buy the stock at the lower price thinking it may bounce back soon. ""Short sellers"" are out to sell borrowed stocks that if the stock is in free fall, unless the person that shorted wants to close the position, they would let it ride. Worthless stocks are a bit of a special case and quite different than the crash of 1929 where various blue chip stocks like those of the Dow Jones Industrials had severe declines. Thus, the companies going down would be like Apple, Coca-Cola and other large companies that people would be shocked to see come down so much yet there are some examples in recent history if one remembers Enron or Worldcom. Stocks getting delisted tend to cause some selling and there are some speculators may buy the stock believing that the shares may be worth something only to lose the money possibly as one could look at the bankrupt cases of airlines and car companies to study some recent cases here. Circuit breakers are worth noting as these are cases when trading may be halted because of a big swing in prices that it is believed stopping the market may cause things to settle down." I would say the most challenging fact for this assertion is that HFT firms operate with extremely limited capital bases. For a stock with say 10m shares ADV, even a very large and successful HFT strategy might use a position limit of no more than 5000 shares.  That is to say if you sum up and net the buys and sells for a stock across the day the HFT firm will never exceed 10,000 shares (2x position limits assuming it completely flipped) on a stock that trades 10,000,000 shares on a given day. The high volumes are attained through high turnover, the strategy might trade up to 500,000 shares (or 5% of the volume) attaining a 50x turnover.  But that brings me back to the original point. In the market microstructure literature market impact generally has been found to scale linearly or even sub-linearly for net volume executed.   If I alternate between thousands of 1 lot buy and sell orders, it would be very difficult for me to move the market because the market impact of every one of my buy orders roughly cancels the market impact of my almost exactly equal number of sell orders.   There might be a higher-order mechanism at work, but I'm genuinely curious what you think it might be. How could strategies that attain such small net positions have such out-sized impact on market direction? "Because more people bought it than sold it. That's really all one can say. You look for news stories related to the event, but you don't really know that's what drove people to buy or sell. We're still trying to figure out the cause of the recent flash crash, for example. For the most part, I feel journalism trying to describe why the markets moved is destined to fail.  It's very complicated. Stocks can fall on above average earnings reports, and rise on dismal annual reports. I've heard a suggestion before that people ""buy on the rumor, sell on the news"". Which is just this side of insider trading." It depends on why the stocks crashed. If this happened because interest rates shot up, bonds will suffer also. On the other hand, stocks could be crashing because economic growth (and hence earnings) are disappointing. This pulls down interest rates and lifts bonds. "Any answer for what to do in a taper will assume ceteris paribus because how markets initially react when they suspect a taper may immediately change depending on what data are released after the taper. For instance, I've seen Soros and a few other hedge fund managers hold shorts when expecting a taper because the theory is that the market may fall.  However, suppose the market falls 5%, but then positive employment numbers are released.  What then?  The same holds true for betting against Emerging Markets (EM), something I've seen Jesse Colombo and others suggest; the claim that Emerging Markets are in a bubble thanks to the U.S. Federal Reserve (the more money they release, the more the money goes overseas ...).  Again, this is possibly true, but if good data are released after the taper for these emerging markets, they could see growth and those with the shorts could get killed. TL;DR - when we ask about what happens after the taper, we have to remember we're assuming some things about everything else.   I do think that the ""safest play"" post taper is what Bill Gross mentioned about bonds (basically a bubble), as we should see interest rates rise and the Chinese seem to be reluctant to buy as much of U.S. bonds as they have in the past (though some, like Mish, assert the U.S. would welcome this).  The other play I like is the VIX (if you think the market will fall) or against (if you think the market will rise).  SVXY has been one of the best plays since 2011 (compare it to the SPY for the same time period)." "First, note that a share represents a % of ownership of a company. In addition to the right to vote in the management of the company [by voting on the board of directors, who hires the CEO, who hires the VPs, etc...], this gives you the right to all future value of the company after paying off expenses and debts. You will receive this money in two forms: dividends approved by the board of directors, and the final liquidation value if the company closes shop. There are many ways to attempt to determine the value of a company, but the basic theory is that the company is worth a cashflow stream equal to all future dividends + the liquidation value. So, the market's ""goal"" is to attempt to determine what that future cash flow stream is, and what the risk related to it is. Depending on who you talk to, a typical stock market has some degree of 'market efficiency'. Market efficiency is basically a comment about how quickly the market reacts to news. In a regulated marketplace with a high degree of information available, market efficiency should be quite high. This basically means that stock markets in developed countries have enough traders and enough news reporting that as soon as something public is known about a company, there are many, many people who take that information and attempt to predict the impact on future earnings of the company. For example, if Starbucks announces earnings that were 10% less than estimated previously, the market will quickly respond with people buying Starbucks shares lowering their price on the assumption that the total value of the Starbucks company has decreased. Most of this trading analysis is done by institutional investors. It isn't simply office workers selling shares on their break in the coffee room, it's mostly people in the finance industry who specialize in various areas for their firms, and work to quickly react to news like this. Is the market perfectly efficient? No. The psychology of trading [ie: people panicking, or reacting based on emotion instead of logic], as well as any inadequacy of information, means that not all news is perfectly acted upon immediately. However, my personal opinion is that for large markets, the market is roughly efficient enough that you can assume that you won't be able to read the newspaper and analyze stock news in a way better than the institutional investors. If a market is generally efficient, then it would be very difficult for a group of people to manipulate it, because someone else would quickly take advantage of that. For example, you suggest that some people might collectively 'short AMZN' [a company worth half a trillion dollars, so your nefarious group would need to have $5 Billion of capital just to trade 1% of the company]. If someone did that, the rest of the market would happily buy up AMZN at reduced prices, and the people who shorted it would be left holding the bag. However, when you deal with smaller items, some more likely market manipulation can occur. For example, when trading penny stocks, there are people who attempt to manipulate the stock price and then make a profitable trade afterwards. This takes advantage of the low amount of information available for tiny companies, as well as the limited number of institutional investors who pay attention to them. Effectively it attempts to manipulate people who are not very sophisticated. So, some manipulation can occur in markets with limited information, but for the most part prices are determined by the 'market consensus' on what the future profits of a company will be.  Additional example of what a share really is: Imagine your neighbor has a treasure chest on his driveway: He gathers the neighborhood together, and asks if anyone wants to buy a % of the value he will get from opening the treasure chest. Perhaps it's a glass treasure chest, and you can mostly see inside it. You see that it is mostly gold and silver, and you weigh the chest and can see that it's about 100 lbs all together. So in your head, you take the price of gold and silver, and estimate how much gold is in the chest, and how much silver is there. You estimate that the chest has roughly $1,000,000 of value inside. So, you offer to buy 10% of the chest, for $90k [you don't want to pay exactly 10% of the value of the company, because you aren't completely sure of the value; you are taking on some risk, so you want to be compensated for that risk].  Now assume all your neighbors value the chest themselves, and they come up with the same approximate value as you. So your neighbor hands out little certificates to 10 of you, and they each say ""this person has a right to 10% of the value of the treasure chest"". He then calls for a vote from all the new 'shareholders', and asks if you want to get the money back as soon as he sells the chest, or if you want him to buy a ship and try and find more chests. It seems you're all impatient, because you all vote to fully pay out the money as soon as he has it. So your neighbor collects his $900k [$90k for each 10% share, * 10], and heads to the goldsmith to sell the chest. But before he gets there, a news report comes out that the price of gold has gone up. Because you own a share of something based on the price of gold, you know that your 10% treasure chest investment has increased in value. You now believe that your 10% is worth $105k. You put a flyer up around the neighborhood, saying you will sell your share for $105k. Because other flyers are going up to sell for about $103-$106k, it seems your valuation was mostly consistent with the market.  Eventually someone driving by sees your flyer, and offers you $104k for your shares. You agree, because you want the cash now and don't want to wait for the treasure chest to be sold. Now, when the treasure chest gets sold to the goldsmith, assume it sells for $1,060,000 [turns out you underestimated the value of the company]. The person who bought your 10% share will get $106k [he gained $2k]. Your neighbor who found the chest got $900k [because he sold the shares earlier, when the value of the chest was less clear], and you got $104k, which for you was a gain of $14k above what you paid for it. This is basically what happens with shares. Buy owning a portion of the company, you have a right to get a dividend of future earnings. But, it could take a long time for you to get those earnings, and they might not be exactly what you expect. So some people do buy and sell shares to try and earn money, but the reason they are able to do that is because the shares are inherently worth something - they are worth a small % of the company and its earnings." "If there is a very sudden and large collapse in the exchange rate then because algorithmic trades will operate very fast it is possible to determine “x” immediately after the change in exchange rate. All you need to know is the order book. You also need to assume that the algorithmic bot operates faster than all other market participants so that the order book doesn’t change except for those trades executed by the bot. The temporarily cheaper price in the weakened currency market will rise and the temporarily dearer price in the strengthened currency market will fall until the prices are related by the new exchange rate. This price is determined by the condition that the total volume of buys in the cheaper market is equal to the total volume of sells in the dearer market.   Suppose initially gold is worth $1200 on NYSE or £720 on LSE. Then suppose the exchange rate falls from r=0.6 £/$ to s=0.4 £/$.  To illustrate the answer lets assume that before the currency collapse the order book for gold on the LSE and NYSE looks like: GOLD-NYSE   Sell (100 @ $1310) Sell (100 @ $1300) <——— Sell (100 @ $1280) Sell (200 @ $1260) Sell (300 @ $1220) Sell (100 @ $1200) ————————— buy (100 @ $1190) buy (100 @ $1180)   GOLD-LSE Sell (100 @ £750) Sell (100 @ £740) ————————— buy (200 @ £720) buy (200 @ £700) buy (100 @ £600) buy (100 @ £550) buy (100 @ £530) buy (100 @ £520) <——— buy (100 @ £500)   From this hypothetical example, the automatic traders will buy up the NYSE gold and sell the LSE gold in equal volume until the price ratio ""s"" is attained. By summing up the sell volumes on the NYSE and the buy volumes on the LSE, we see that the conditions are met when the price is $1300 and £520. Note 800 units were bought and sold.   So “x” depends on the available orders in the order book. Immediately after this, however, the price of the asset will be subject to the new changes of preference by the market participants. However, the price calculated above must be the initial price, since otherwise an arbitrage opportunity would exist." Nominal. What you say is true, but I'm guessing it would be too complicated to modelate. Plus, a shareholder of a very large company would not necessarily experience said loss if he/she sells the stock in small chunks at a time. "What if everyone decided to sell all the shares at a given moment, let's say when the stock is trading at $40? It would fall to the lowest bid price, which could be $0.01 if someone had that bid in place. Here is an example which I happened to find online:  Notice there are orders to buy at half the market price and lower... probably all the way down to pennies.  If there were enough selling activity to fill all of those bids you see, then the market price would be the lowest bid on the screen.  Alternatively, the bid orders could be pulled (cancelled), which would also let the price free-fall to the lowest bid even if there were few actual sellers. Bid-stuffing is what HFT (high frequency trading) algorithms sometimes do, which some say caused the Flash Crash of May 2010.  The computers ""stuff"" bids into the order book, making it look like there is demand in order to trigger a market reaction, then they pull the bids to make the market fall.  This sort of thing happens all the time and Nanex documents it http://www.nanex.net/FlashCrash/OngoingResearch.html Quote stuffing defined: http://www.investopedia.com/terms/q/quote-stuffing.asp I remember the day of the Flash Crash very well.  I found this video on youtube of CNBC at that time.  Watch from the 5:00 min mark on the video as Jim Crammer talks about PG easily not being worth the price of the market at that time.  He said ""Who cares?"", ""Its not a real price"", ""$49.25 bid for 50,000 shares if I were at my hedge fund.""  http://www.youtube.com/watch?v=86g4_w4j3jU You can value a stock how you want, but its only actually worth what someone will give you for it. More examples: Anadarko Petroleum, which as we noted in today's EOD post, lost $45 billion in market cap in 45 milliseconds (a collapse rate of $1 billion per millisecond), flash crashing from $90 all the way to an (allegedly illegal) stub quote of $0.01. http://www.zerohedge.com/news/2013-05-17/how-last-second-flash-crash-pushed-sp-500-1667-1666 How 10,000 Contracts Crashed The Market: A Visual Deconstruction Of Last Night's E-Mini Flash Crash http://www.zerohedge.com/news/2012-12-21/how-10000-contracts-crashed-market-visual-deconstruction-last-nights-e-mini-flash-cr Symantec Flash-Crash Destroys Over $1.5 Billion In Less Than A Second http://www.zerohedge.com/news/2013-04-30/symantec-flash-crash-destroys-over-15-billion-less-second This sort of thing happens so often, I don't pay much attention anymore." I don't know about the liquidation. The capital doesn't evaporate, its source just becomes the corporation itself. The corporation becomes the sole shareholder and acts at the behest of the board. The board then decides both board matters and shareholder matters.  Once I talked that through, I realized no one would do this. If the board is in complete control, why clump the ownership together. The directors would be better served by clearly delineating their ownership interests by purchasing shares directly. The stock exchange here serves as a meeting place for current shareholders who want to sell their shares to someone else. This has nothing to do with liquidation, which is a transaction between the company and its shareholders. A company does not have to be listed on an exchange to make distributions to shareholders. I was looking at NAT and NAO, NAT owns 20% of NAO.  They trade opposite each other on the price of oil, low is good for NAT, bad for NAO.  In bad times the other company's stock would probably rise, so they could trim excess shares to keep a stable monetary holding.  This would create cash in bad times, in good times they could buy more, creating a floor as well for the other. "A major danger of keeping ""emergency"" funds in the form of stocks is that many of the scenarios where one would need quick access to the money will also momentarily depress the stock market.  Someone whose emergency funds were in some other form could avoid selling stocks during a momentary downturn, but someone who has no other emergency funds would have no choice but to sell during the downturn (thus losing money as well as making the downturn more significant for everyone else)."