Stock Markets Are Down, What We Should Learn From It

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Arca Biopharma ABIO Stock News

CNN Money Stock Market ScreenshotHas anyone noticed the stock market tanking? Of course you have! The reality is, the last trading day of January left us with nothing more than upset. January was literally the worst January we’ve seen in years.

It All Started In Early November

For a while now, markets have been producing incredible gains. Earlier in the year, I started investing personally, and boy did I enjoy gains. However, as I invested, I researched quite a bit about how the market works, and thought to myself, “Now hold on here, something’s not right.” Here’s my basic understanding of how the market works(Don’t want to get too deep into boring details, you might not stick around for that)…

Stocks are based on underlying assets. As the underlying asset increases in value, the stock should follow, and vice versa of course. Value says a lot and tons goes into determining the value of any asset. For instance, anticipation of the new iPhone flying off of the shelves can increase our perceived value of a company. When that iPhone did come out and sales were less than impressive, the value of Apple went down for a multitude of complex reasons. One of those being the inability to move their flagship product. However, no matter what happens in the market, if overzealous investors invest enough to raise the price of a stock beyond the value of its asset, corrections happen and lead to losses. OK, so enough of the boring stuff.

In November, I started noticing that the increases in the values of my stocks didn’t seem natural. It seemed like money was somehow being pumped into them to make them go up unnaturally. So, I wrote a post on PennyPinchinMom.com called “Is There Something Scary Going On In The Stock Market?” asking readers for assistance in figuring out exactly what’s going on. I didn’t get too many comments, but the first one I got was pretty important. The comment explained a process called Quantitative Easing.

Huh?

I know, I had the same reaction at first. What’s happening in the feds are printing extra money out of thin air. Much of which is going into the stock market. By making people feel like there is more money than there really is, the plan is that people will start spending more. There’s also a bond buying program designed to make everything look peachy keen in the stock market that the Federal Reserve has recently decided to slow down on.

So, What Does All Of This Have To Do With The Market Crash?

Once I learned about the Quantitative Easing process, I started to realize why my stocks were doing so well. And, of course, I started to worry a bit. The simple fact is, the stimulus programs that were and are still going on inflated the price of almost everything. No matter if that be stocks, or a gallon of milk. That’s not all. Increased prices would be OK if the plan worked, but it didn’t!

The plan was essentially to give investors a false sense of hope. The only problem is, no one really bought into it. They told us financial times were getting better, but as consumers, we knew they really weren’t. We could see it all around in our day to day lives. So, we stopped spending. We started saving and preparing for possible financial doom. As a matter of fact, psychologically, the plan really backfired.

The idea was to tell everyone that everything was all better now so that we’d start spending. Our financial lives basically remained the same. Since we didn’t see the change as we were being told that things were getting better, we started to reserve even more. We created plans and started investing. What we didn’t do was start spending. I’m no psychologist, but I think that’s because we were all looking around saying, “If it’s really getting better, I need to be doing something different ‘cause it ain’t getting any better for me.”

What We Should Learn From This

When investing, you’re essentially playing a highly calculated game of Chess. It’s important to not only think about the here and the now, you have to also think about future moves. Now, no one can tell the future, or at least as far as I’ve seen through my own eye’s no one can. However, by looking at market trends and doing a bit of research, you can get pretty damn close. Before making any investment, look at the history of the asset, or company. Think about what that company provides and the demand for those products. More importantly, look at all financial information you can find about the company. Does the price of the stock match what you believe the asset is worth? It’s important to think of all of these things when investing, and not only when our investments are down!

Reader Question

Did the crash catch you off guard?

12 COMMENTS

  1. Investing is definitely not for the weak of heart. Before I advise clients about investing, we discuss the natural roller coaster that is the stock market. The best way to enjoy the “ride” is to make sure you don’t have emergency money invested and that you truly have a long term view and when these dips happen, make sure you are in a place to take advantage of them. Turn a negative into a positive by buying stocks when they decline.

    • Hey Shannon, thanks for swinging by. I’d have to agree, investing is a long term process, and taking advantage of the dips is a good thing. So, I’ve got a question for you. Is it too early to take advantage of this one? My thought is we’ve got another month or two of correction happening. If that’s the case, buying on this level of the decline would only lead to a loss before profit. What are your thoughts?

    • Hey Stefanie, investing is definitely a long term subject for most. However, even on the long term, it’s best to know how to take advantage of slumps in the market. Thanks for swinging by.

  2. Hey Daisy, you know, a lot of people are doing that. My only fear is that the markets haven’t stopped their downward trend yet as correction does take some time. Let me know how it works out for you.

  3. I think 2014 is going to be a very interesting year in the stock markets. Personally I think the market is going to correct. But- timing the market is tough and even the “experts” won’t/can’t say one way or another which way the market is going (until it actually happens.) What is the average retail investor to do? Hopefully if they have a long-term view and understand and believe it what they have invested in they will not panic and remember markets go up and down.

  4. I was thinking over the weekend that it’s a great time to buy. Prices are finally going down and if I do a little dollar cost averaging I can get more at lower prices as the stock market goes down. We’ll see. Nice article!

  5. I really love investing in stock market. I’ve tried many financial loss but it doesn’t stop me. This kind of investment really needs big heart and motivation. If you think you have big heart and motivation then try investing stock market and learn some tips form this article.

  6. Personally, I really didn’t quite notice the Stock Market down from when it really hit bottom. I mean no one really understands or knows really except for the experts. So I think the people around the US should really know what is truely going on and try to explain better what we can do to fix it. If it is even fixable.

  7. Looking at stock market gains as an economic indicator these days is highly flawed … looking at Main Street tells you all you need to know about the strength of the real economy!

  8. I think when the market crashes is the good time to buy new stocks. We don’t know for sure if the price is still going down, but if the current price is wayyy lower than it was before a couple of months ago, I don’t think we should wait anymore… Especially if the technical analysis says so.

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