Why is it bad when people sell their stocks? I don't quite understand the market dropping like it is.?

Question

I guess my question is why are people freaking out about sub prime mortgages, and why would they sell shares because of it?

Answer 1

Because of the insecurity of sub prime mortgages, and the fact that a percentage of these will end as re-posessions, some companies holding these mortgages could find themselves with liquidity problems. Investors in these companies will get nervous, and want to get their money out before the company collapses. These companies then sell their shares in other companies to get the money to pay out their own withdrawing shareholders. If a lot of shares in a company are sold, these shares drop on their price. This tends to make shareholders in other companies nervous, and they sell before the price drops too much. You then can get a snowball effect, but usually the market stablises itself after a short while, because most investers are there for the long term, and accept the minor rises and falls

Answer 2

Interest rates are going up. When interest rates
go up, the market comes down because the big
movers (money managers) move blocks of stock
into bonds.

To compound the problem, people who short
stock , are also selling, then buying back at the lower
price. And this gives added momentum to downward
slides.

The sub prime mortgages have added to the credit
crunch. Basically, this is because wages have not
kept up with inflation. Currently, there are too many
would-be home owners working at minimum wage,
who are trying to buy a half-million dollar home.

It's time the government stops mis-leading people
about inflation and the CPI (consumer price index)
Recently, there was a very interesting article in
the business section of our local paper. It simply
stated: "If we were to calculate prices the way we
did back in the 70's, we would be in double digit
inflation."

Answer 3

You can NOT go by the "news" reports. A lot of the selling is simply market adjustment. It went up too fast recently, people are simply adjusting. Sub Prime Mortgages is only a small piece of the pie, as is oil, gas, gold, etc.

There is NO "bullet proof" way to gage WHY the market goes up or down, despite the media hoopla! :)

Invest in a good company with a strong balance sheet and hold on, it's that simple. :)

Answer 4

Right or wrong people are scared that the "sub-prime" problem will effect the full economy. If the economy is effected, profits go down and the value of companies may be effected negatively.

If the companies are worth less... then the value perceived is less. Buyers won't buy at the perceived inflated levels. Sellers are scared that the stocks will go down further.

It's great you're trying to understand the market. I hope that you're not in it until your understanding grows. Getting in without a full understanding will cause you to sell or buy at the wrong times.

Good luck.

Answer 5

1) The market does not like uncertainty. Since nobody really knows how bad things are it's sell first and ask questions later.

2) If BSC/MSC/MER are looking at huge losses down the road they may be raising cash by unwinding some of their own trading positions. You don't want to get in front a multi billion dollar train.

3) Fear makes people act irrationally. Sell because everybody else is selling - so there you have a trend that feeds on itself.

Answer 6

Because the motrgage rates effect a lot of things.