Tuesday, April 7, 2009

What Is Behind A Sell Off?

I hear people wondering what the reason for sell offs are all the time. But sometimes there just isn't an answer except for the fact that there are simply more people selling stocks than there are people buying stocks. Jim Cramer did a good little segment about it that I want you guys to watch. If you want to be a solid equity investor, you need to know why markets move. You need to understand that when stocks are traded, it is someone selling their shares to someone else. Sometimes there is no significant news or events to anticipate. 

For example, say someone wants to sell 100 shares of Microsoft at $17.00 a share, but there is only one person out there trying to buy Microsoft at 17.00 and he only wants 50 shares. Now, someone else also wants to buy 50 shares of Microsoft, but only at $16.00 a share. The seller now has to sell half his shares at $17 and sell the other half at $16, which now drives the price of Microsoft shares down to $16.00. Microsoft stocks fell a dollar not because a fundamental change in the company, but simply because there was not enough people willing to buy the stock at a certain price level that day. The next day the exact opposite could happen, and someone who really wants to buy 100 shares of Microsoft will have to buy 50 shares at $16.00 and the other 50 at $17.00 a share, driving the price back up. 

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