Investing & Day Trading Education:  Day Trading Academy

Why did the stock market crash?

We were getting a lot of questions in regards to the market crash in the last three or four days, so we wanted to do a quick video explaining why this happened. We have a situation now, since the big crash that we had in March (when oil went negative because of shutdowns and the coronavirus pandemic), where governments decided to “help the economy out” not only by just giving free money, but also making sure that economies “don’t fail” by injecting money, not only in the stock markets but also free checks for citizens with stimulus and every other strategy. So, what this has caused is a very speculative environment, especially when it comes to stocks, because it’s like: “Stocks can’t fail” and this is extremely dangerous. After all, eventually when the market does go down, then everybody’s caught in the trap because they just think it can go up for ever.
So, what happens? The market starts to go up, everything starts going up, and we have a situation where you literally cannot lose until the end. People start investing in stocks, everybody starts winning. Then, people start leveraging themselves, they start borrowing money to buy stocks, they take loans, and after they start leveraging themselves then the market goes even higher and there’s even more euphoria. The market continues to go up and up, record high after record high.

Then what happens is that a huge fund, for example, comes out with a report saying that they closed a lot of their big positions in a lot of these big tech companies, then people say “wait a second, if they’re closing their positions, maybe I should close mine too”. The market goes down a little bit, it doesn’t continue going higher and because so many people are so highly leveraged, a lot of these brokers do what’s called a ‘margin call’ when you have to cover your leverage (the money borrowed), and then it’s just a house of cards essentially. That’s what happened with the stock market, the value of the stocks continue to go up without any actual fundamental principles, it’s just based on euphoria and speculation, so the market continues to go up and up, and once it doesn’t continue to go up anymore people that are over-leveraged and are over speculated turn into a situation where they can’t cover the leverage they have, which is essentially a loan, so they have to close their positions or put more money, but they don’t have any more money.
So, essentially, that’s why the stock market crashed.

Post a Comment

Your email address will not be published. Required fields are marked *

Call Now ButtonCall Now