On December 4th of 2018, the United States stock market took a hit that sent investors into a near panic. The full reason behind the drop is only beginning to be understood, but market analysts assume it has a lot to do with recent global events. Many fear economic repercussions after trade negotiations with China and the tumult of United States politics now. This does not make 2018 look good regarding the stock market. The state of markets has already been uncertain since mid-October when stock prices plunged lower than they had in months.
What amateur investors and those unfamiliar with the way the stock market works might be interested in knowing is that the December fourth drop was the consequence of chain reactions on all levels of investment. Professional investors saw this as a potential indicator of economic slowdown, which impacted the way their investment group interacted with stocks. Investment apps and algorithms saw this drop and reacted according to their programming, causing even further descent. Lastly, individual investors saw their investments falling and reacted accordingly.
Only a week from this fiasco and with stocks continuing to fall, the future is uncertain. One thing that is certain, however, is that all eyes are turning toward professional investors and stock market analysts for answers. And while it is important to listen to seasoned voices when it comes to investing, many are making a mistake in equating success and age in the business.
The difference between amateur investors and professional investors is not and cannot be thought of as age. If age were the only factor, the stock market would never evolve and would be on a start toward a downward spiral of self-destruction. Instead, all the most successful investors and investment bankers have a strategy that involves more than just the knowledge of their forebears. Stocks often fluctuate drastically, but the recent fluctuation fueled by foreign and domestic deals provides a fair amount of murk in what were clear waters. The only remedy here is to remain calm through the storm, and most importantly to listen to everyone and be open to change.
A Remembrance of Stocks Past
Anyone who lived through or shortly after the eighties has a clear image of the stock market in their head because of its important role in movie culture during the times. Images of the NYSE “pit” call to mind a shark-like frenzy as floor traders rush to make trades and ultimately support their own livelihood. Indeed, amateur investors also continue this myth. However, the evolution of technology over the past few decades has also transformed the way that the stock market operates. For the most part, the “pits” are quieter and less animated and have given way to electronic trading and exchanges.
This is not to say, however, that technology-based stock exchanges have not been without its frustrations. Evolutions often make some things easier while making other elements of trade much harder. Those who own computers and work on them (even in a non-professional sense) experience many of the frustrations which traders work with daily. Glitches, for example, are prevalent and can impact not only the efficiency of the stock market but the worth of a stock overall.
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One of the most impactful things that have changed with the advent of technology and its application to stock markets has been program trading. Program trading is when AI or computer algorithms are used to determine when to buy and sell stocks. Before, trained and seasoned stock managers would use their expertise in conjunction with research to determine when to buy and sell stock shares. Artificial intelligence took over this role as AI’s capabilities grew. Learning about and storing previous market trends allows program trading to perform just as well as humans but without human error – like company bias or emotion.
Of course, independent research and human-based trading still exist. Many fuel their entire careers off the ability to read the markets and make trades. Another thing that technology played influence into, however, was the rise of day trading. With stock market information available on smart devices and computers worldwide, more and more people have dipped their toes into the stock market and many have made day trading a part of their daily routine. Day trading involves significant risk and has ultimately changed the way stocks are traded and the way AI reads algorithms. In short, the changes and the growth reflect on each other and influence the way in which the stock market works.
If there is any one event that could point out the necessity of adaptability it is the change of the stock exchanges. Technology has brought new faces to the scene – from amateur investment apps to startups — and it was important for professional stock traders to meet the demands of the rise in technology. But these demands are symbiotic and require give and take from all areas of trading. Without flexibility, stock markets can and will crash.
And what many fail to remember is that failure to adapt has happened in the past and caused former crashes.
History Repeats Itself: Former Crashes and What Fixed Them
You don’t have to be a history buff or an investor to understand that the stock market crash of 1929 was one of the most influential and catastrophic crashes in United States History. After experiencing the roaring twenties, where economic growth and individual decadence was at an all-time high, the stock market crash of ’29 ruined lives. And while the market itself sorted things out in a relatively quick time period, the impacts lasted until the mid forties. This event was one of the major players in the Great Depression, which is why this particular crash is so memorable even to those who do not invest.
For those who do not invest, it might be interesting to note crashes have happened quite frequently throughout history. Often, it takes time for the economy and the markets to dig its way out of crashes, but it also requires that investors re-learn certain aspects of trading that have become commonplace and learn new trends in trading to move forward.
Black Monday the 2nd, or Monday, October 2nd, 1987, was almost as catastrophic as the 1929 crash in the United States, but worldwide had possibly a much larger impact. On that day, stock markets worldwide crashed. In part, this was due to slowed economic growth in the United States after the mid-1980s. In 1987, the stock markets peaked, but oil prices began to increase. This ultimately caused the initial crash, then unforeseen circumstances like London’s Great Storm of 1987 and the sinking of two US supertankers by Iran caused the markets to fall even more.
Internally, the crash was caused by rising fears about the economy, which in part was formulated by these historical events. As a result, trading rules were reformed, and eventually, the market got back to where it was before October of 1987.
Then, there were the “Dot-Com Bubble” crashes of the Y2K era. In an era already stoked by political unrest and fears of the Y2K bug, the last thing the United States needed was another crash. But as it often happens, this political unrest was directly related to national fears about technology. During the mid-1990s to the early 2000s, the internet was growing exponentially. This made internet-based stocks a hot commodity for investors and is what caused such rapid growth and expansion in the mid to late 1990s. Websites like Pets.com, Boo.com, and Webvan expanded so rapidly and so much that when the markets fell, they didn’t recover. Even big names in technology and the internet today, like Cisco and Amazon, lost so much that they took a while to recover.
This investment time, though also fueled by many internal goings-on, marked a new point in investment history because it showed it was directly related to political and economic markers. The introduction of the Telecommunications Act of 1996 and the Taxpayer Relief Act of 1997 both influenced the way stocks were bought and sold. Whereas the Telecommunications Act of 1996 made people more eager to invest in technology-related stocks, the Taxpayer Relief Act brought in more investors who might not have had the means to invest before. Then, the unrest caused by speculation about the Y2K Bug, or the Year 2000 Problem made telecom and dot com stocks volatile, which caused the crash. To recover from it, the determining factors of the worth of a company were re-evaluated, more caution was taken when investing in tech companies, and emphasis was placed on evolving technology.
One crash that many remember more potently is the recession of 2008. At the end of the 2004-2008 presidential candidacy, the markets fell 90% over the span of 18 months. Many large companies were running out of money, spearheaded by the Lehman Brothers declaring bankruptcy in early September 2008. Two years earlier, when housing prices started to fall, banks began to lend to people with less than exemplary credit, which caused the national debt to rise. When borrowers failed to pay back these companies, the companies started to get into hot water, which caused their stock prices to lower. Even though the federal government made multiple efforts to bail big companies with high economic states out of their debt, it didn’t work. The United States landed itself in the lowest economic status since the Great Depression, and the stock markets went with it.
Luckily, investors put hope in the new presidential administration to bail the economy out, and that caused the stock market to pick back up in January. Although the market remained volatile until 2013, a new stimulus package brought the economy back from the brink and the stock markets along with them.
Sandy Chin’s 5 Ways to be Mindful and Practice Level-Headedness During a Drop
Stock market drops, especially for small-time investors, can be especially scary as uncertainty about investments looms. But as history shows, these drops are often temporary, and though they sometimes take longer to rebound from they work themselves out. Still, keeping calm when your money and livelihood is on the line is its own full-time job. Here are some of the things that professional investors and entrepreneurs do when markets experience volatility. While they aren’t a cure-all or elixir that makes everything immediately right, they help investors keep cool and make good decisions while waiting to see the outcome of the market.
- Research the History of Your Stocks
In December of 2018, Apple’s stock prices dipped historically low. While many factors are cited as to why, reports speculated that this might be the time to cut ties with Apple. Many reporting on Apple’s situation considered them at a plateau, but history shows that many stocks go through ups and downs. Growth has slowed from the 37.3% growth reported at the beginning of this stock offering. But that does not necessarily mean that it will decline from here. Researching stocks not only asks that investors put faith in a stock but gives investors a better idea about what might be happening with the overall market. Now, many classically productive stocks are in decline, which means more research and consultation with a variety of stock experts is important currently. Financial analyst and portfolio manager Sandy Chin says that before even investing in any stock, research should be done about that stock. Not only will this help investors understand whether an investment in that stock is a good idea, but it will also help them understand when to buy and sell shares in the future.
- The More Opinions the Merrier
While many voices all at once might be confusing to some, it actually helps in understanding your investments. Investment experts often have expertise in specific stocks, specific markets, and their strengths lie in different aspects of the investment process. Relying on only a few voices to mold your stock market knowledge is a mistake. Sandy Chin recommends listening to those with more experience than yourself, relative newcomers, and everyone in between. This will form a well-rounded knowledge about the elements of trading and will help you know when to sell and when to hold on to your investments.
- Invest in New Stocks
If a major stock like Apple does become a “sell” stock, it is important to widen your portfolio by investing in new stocks. This is where investment takes on an element of risk, but by following the previous step and gaining knowledge about many stocks, finding a new stock to invest in should not be hard. That way, if your tried and true stock becomes a “sell” stock your new investments have a greater potential of making you money in the wake of that stock’s sale.
Investing in new stocks goes with Sandy Chin’s “willing to learn” philosophy. She believes that younger entrepreneurs should give potential investors and investments equal amounts of time as well as learning more about them. Even if investment in a new stock is short-term, it helps you gain an advantageous knowledge about competition.
- Go into Investment with a College-Like Mindset
In many ways, entering the United States stock market is like attending your first day of college. You think you’re at the top of your class, but even by taking your first class you realize you might not know quite as much as you thought you knew. The stock market will never be up to luck, and there will always be new trading techniques to learn and potential investments to investigate in order to get the most out of your experience. If you’re determined to grow as the stock market grows, then chances are you will be successful. Error and missteps only happen when investors make the foolish mistake of thinking they know everything there is to know about the markets. Following the previous three steps will offer the opportunity to continue financial education and stay cool as the markets fluctuate.
In addition, Sandy Chin believes that all new entrepreneurs should expect to put in extra effort and keep in mind this effort will need to be sustained over their careers. “Conditioning your mindset for the retention of lots of information is crucial”, says Chin, “and in the long run it will help you learn more information in shorter amounts of time, which gives you an obvious advantage over your competitors.”
- Don’t Undervalue the Power of the Individual Investor
Much debate goes on about the worth of the individual investor’s role in the future of the stock markets. Investing seems inaccessible to most Americans, and the relative concentration of investment by day traders plays a big role in how the market performs. Encouraging others to invest in stocks, from those who have invested for years to those who are relatively new at it, will not only help the market thrive but might change the market for the better. The individual investor plays a vital role in the market and without them, the markets would look much different.
“Ambitious and Eager,” reminds Sandy Chin, “Entrepreneurial organizations often start out as individuals, and without ambitious and eager attitudes nothing would get done – including massive changes to our economy and stock markets.”
As the year wraps up, many investors are on the edge of their seats. Will we see further market drops? Will the prices of stocks change drastically and leave investors rethinking their strategies? Only time will tell. But one thing that is certain is that it will be continually important for investors to listen, learn, and remain flexible. Individual growth and the growth of the stock market depends on it.
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