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If you are referring to the current problem with the stock market, it has to do with the financial collapse of the sub-prime mortgages that came through Fanny Mae and Freddie Mac.
These mortgages were bundled and sold as securities and were bought by many investment houses thereby allowing the crisis to reach deep into the financial system beyond the bank that lent the money to the people who were unable to pay the money back.
In response to this shock to the market, many investment houses went out of business, suddenly finding that their assets had no value. Additionally, the credit market tightened up considerably in response to the bad credit that was dominating the news. Suddenly, people who had good credit could not borrow money either because all lending institutions were afraid to lend anyone money, even bank to bank lending was tightened.
The stock market is a reflection of the future, it is highly sensitive to any movement by the federal reserve, or numbers in the job market or consumer spending.
The stock market is a measure of the health of the economy. When things are bad, the bears, or the sellers dominate the market. If everyone sells or dumps their stock, bonds, etc, the market goes down because the value of the investments go down. That is how the market loses so many points in a single day.
Literally the value of the investment instrument has been lowered by the fact that no one wants to own it.
The major problem of stock market is highly fluctuating stock prices which are much beyond the the possible changes in real worth of companies representing the stock.For example, the stock index of the Mumbai Stock Exchange (Sensex) increased six folds in four years to reach a level of 21,000 in 1998, just before the crash, and then dropped to 8,000. Fluctuations like these in collective real worth of all the companies represented by Sensex is just impossible.
When the going is good and stock prices are on the rise, the politicians and business leaders encourage the public sentiments and expectations to push up the stock prices to very high levels. They do this to serve their own selfish ends. Politicians claim that the economy is doing very well and bask in the glory of their success. Business leader make huge profits by unloading their shares to the gullible public at very high prices.
But a price rise like this cannot be sustained for ever and then it suddenly crashes like an overinflated balloon bursts just with the touch of a small pinprick. When this happens, lot of common people loose money and the sentiments of people turns from overoptimism to over-pessimism. This is what happened during the Great Crash of 1929, and also in 1998 leading to current crisis.
The Internet problems in the stock market rely on the fact that information may be false and misleading either causing stock prices to rise or fall. Also, illegal activity can create such situations as pump-and-dump, in which a few individuals artificially inflate the price of a stock for their own benefit, leaving information for the average individual investor out of the loop of correct and tru information.
"…The stock market is among the most volatile financial institutions in business. And it's this volatility that tends to be the biggest problem with the stock market. Almost any reason, real or imagined can cause these extreme fluctuations that often affect the stock market's credibility. Real factors such as the weather, political instability, political decisions, war, terrorist threats, boycotts and strikes, economic trends and international trade or even company scandals also become factors to the stock market problems. Bad weather such as hurricanes affects certain industries such as oil production. This then drives the cost of petroleum products higher as production gets limited. This causes a cascading effect that drives stocks of oil companies higher…"
Political instability in a country can affect investor confidence thus lesser investing is done. This causes the shares of local companies to slide downwards.
But aside from uncontrollable factors such as natural disaster (or war), the common underlying link that allows these other reasons to affect the stock market so significantly is investor psychology. Humans are prone to herd mentality. Often, people confirm with the actions and directions of other people. This is a common mistake in investing.
The stock market is an interesting animal. There have always been problems and opportunities. The day trading boom changed the stock market dramatically. People no longer had to have access to an inside man or a position on the stock market. The internet allowed them to do research, and companies like etrade were more than happy to facilitate the process. Did this contribute to the volatility of the stock market? I think that it did. The stock market was always volatile, but this is a whole new ball game.
In recent years, the stock market has achieved significant reductions. Some short-term investors have lost some money. Many new stock market investors look at this and be very skeptical about doing now. Many people are indulging in forex trading as it is a continuous business that can generate substantial income.The secret behind successful forex trading is discipline and a good understanding of currency fluctuations and market volatility.
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