A few people have been asking me this question so I thought I’d do a quick post explain the situation as I see it. But before that a quick announcement.

***The good people at Bullbearings have published an article of mine entitled ‘Trading Basics: How to Profit in a Falling Stock Market’.***

Why are stock markets going down?

Debt and lots of it.

So much so that people far smarter than me are worried that some national governments are unable to pay the debts they owe to other governments, to their own banks and banks across the world.

This interconnected indebtedness whereby borrowing has been piled on top of more borrowing has been growing for years. This has caused fear among people who are large players in the stock market that the value of the shares they have will go down and so they sell them fast.

Because these big players who are selling shares hold lots of shares, smaller players who may have shares in the same company as the big players are seeing the value of their shares fall. The small players also sell their shares as they see others sell them and the fear factor starts to grow. Big and small players alike are affected by the fear that their investments will fall in value. The previous stock market report detailed how I sold my own positions in UK companies last week

So where does this fear come from?

Take banks.

You only need to look at the share price of Barclays (BARC) since February for an example of selling based on fear. Some of the fear (and selling) in previous weeks is connected how much exposure Britain’s banks have to Greek debt.

Typically in these situations, investors sell these shares and look to invest their money into so called ‘safe-havens’ such as gold. This has contributed the rocketing of the gold price since 2008, a time when the world woke up to the fact financial institutions had spent way beyond their means.

To add to the mix, a traditional safe-haven investments in the past has been US government debt which was downgraded last week on the basis that the US government does not have the political will to solve America’s economic problems and NOT because it is unable to pay its debts. This has only added to the market turmoil over the recent weakening of US government debt as a safe-haven investment has made investors/big players more fearful as they are running out of places to put their money where it is safe. Except for gold.

A final point I would add is that Italy, Greece, Ireland, Portugal and the US have had the ability to pay their debts brought into question. Indebtedness is rife in the two largest financial markets in the world: Europe and America. Because they are so large, their prices affect the financial markets of the rest of the world which is why we are seeing a worldwide sell-off.

Anyhow that’s my 2p worth and I welcome questions and comments whether you agree or disagree as to the accuracy or helpfulness of this article :)

→ You may also be interested in ‘Will Stock Markets Continue to Go Down?’

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2 Responses to Why are stock markets going down?

  1. Kurt says:

    The day we all understand that the market is all one big game and we invest on value and not emotion, is the day that the markets will turn around. Most of us hold very good companies that have very good valuations. The junk has been sold off. Let’s get over the emotion and grow this economy with some action.

    • Indeed it is a game and a serious one, at least for me. A lot of savvy investors/traders understand your point entirely about not getting emotional as well as the fact we have bargains all around us at the moment.:)

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