First, a disclaimer… I am not a stock expert. I am not giving you financial advice or investment advice. I am just telling you what I have personally noticed.
There are approximately 144 stock exchanges around the world. The largest is, as you might guess, the New York Stock Exchange (NYSE). The concept of stock is simple enough. A share of stock is a small piece of ownership in a company. If you really like a particular company’s products or services, you might bet on their future success by buying some shares of stock. That’s how it should work, right? But the reality is so much more complicated. If you look at stock charts, what you see there is just the price per share. The price per share goes up and down over time. When you look at a chart of the famous DOW Jones Industrial Average or the S&P 500, you are looking at the combined price of a specific set of stocks, and how that combined price goes up and down over time.
So what drives it up? And what drives it down? Stock traders are always trying to dissect exactly those questions. Obviously, if a company is not making enough profit, that will drive it down. If that same company reports more profits than expected, that will drive its stock price up. But it is so much more complicated than that. Headlines involving the company leadership, news about new government tariffs, or trade wars, new trade deals at the national level, and other local and global economic factors drive the price per share up, and down and cause all manner of volatility. That is why the charts look the way they do.
Stock charts end up looking like Brownian motion – totally random. Stock traders then use dozens of different measurements and indicators to analyze these seemingly random charts. When certain indicators say “buy”, they buy. When other indicators say “sell”, they sell. But it becomes a very emotional game. When you watch the price of your stock drop, you are itching to get out of it. And that might be the wrong answer entirely. What if it rebounds?
Enter the robots. In a bid to remove the emotions and complexity from the stock market game, many traders prefer to use trading robots. These bots are just software apps designed to trigger buy and sell orders based on various indicators and measurements. Sounds like a great idea, until the average Joe gets involved. Since the advent of online trading, anyone can be a stock trader. And that means there are lots of people buying and selling based on emotion.
The result looks something like this: riots break out in some random city, nowhere near Company A. Media headlines, hungry for clicks, exaggerate and sensationalize the day’s events. Emotional traders, fearing a total national crisis, start selling everything. The price of Company A’s stock starts dropping, triggering a cascade of bots to sell, sell, sell. Meanwhile, none of these traders has considered the question of whether Company A is actually affected by any of this. Or is Company A, instead, going to have an advantage now because of the day’s events? A few smart investors will do the research and spot a bargain. They will buy up Company A’s stock and wait for the rest of the world to come to their senses. The crisis passes, Company A’s stock rebounds, and a few smart people just made a profit while a lot of emotional people and bots lost big.
The stock market does not trade by itself. It is not some nebulous electronic deity, or third party beast to be studied and predicted. It is just a bunch of people making choices about buying and selling. Some of those choices are emotional, rather than based on reality. So what you really see when you look at a stock market chart is this: human emotion.
In general, when people are upset, it goes down. When people are happy, it goes up. Negatively charged emotional happenings like civil unrest, national elections, and mass violence send stock prices down. Positively charged emotional happenings, like renewed stability, new trade deals, lower taxes, and peace agreements, send stock prices up. There are plenty of individual stocks that will not follow those trends, but in general, if you are watching the large indexes, this is what you will notice.
Fear will cause people to sell, which drives the stock price down, which makes other people afraid, which makes them sell too, and on down we go. Fear begets loss, and loss begets fear. Likewise, joy begets gain, and gain begets joy. So the nature and effect of the stock market’s natural waves of joy and fear is this game we call trading. It is a magnified mirror of our own collective societal mood.
So what does that mean for you? Get a good wealth manger or investment advisor who is not emotional, but understands how emotions drive the markets, and don’t freak out when the market drops. That just means it is in sale. Look for the bargains.
