By: Rolf Li
Stock markets around the world have seen several tough summer months, mainly highlighting the weakness in the Chinese economy and a huge oversupply in most commodity markets, such as oil, which has seen surplus per day average at 1.7 million barrels. With all this negativity in the global economy, a correction for the major stock markets was bound to come, right?
To begin with, markets are not always defined by the state of an economy in a report or a bad fiscal quarter or year. Stock markets are mostly based around trading the future value of a company or an industry. Companies or countries are defined by the value the shareholders believe that the company is worth – in other words, they are worth only as much people believe they are worth. This amount of “fake money” or “image value” is the real danger in our economies and stock markets, and this practise will be the end of mass capital value as we know it.
So you might ask, “This article is on the Chinese slowdown, and why it affects markets, so why is Rolf talking about the definition and concept of stock markets?”. Understanding the root of the problem is the key to comprehending why stock markets now overly-react to every piece of information, large or not. As the value of a company, industry, or country is completely dependent on how much people think it is worth, it is easy to be frightened by a piece of bad news – to the point of a complete sell-off. When a negative report surfaces about a particular economic subject, the value of the affected companies or industries collapses, because the value is directly related to the value people believe the company is worth. If shareholders believe that the value of the company is lowered, the stock price is lowered. The whole problem of this system of no direct monetary value trading, is that the real economics of a company or industry is not massively affected by negative trading, which makes the practise extremely dangerous.
When the government of China finally admitted that the economy was slowing down, shareholders started to “realize” that the companies that they have shares in are going to collapse due to a minor slowdown in a still-massive market. There is no thinking in this type of trading because of a weakness in direct company value correlation. Companies “value” cannot be determined in the most part by shareholders in previous times, it is supposed to be determined by the value of the products and services they provide, but in this case, the true, hard-value of affected companies were trumped by the common value that people believe – creating a massive correction.
So in the end, why do people completely over-react when a piece of bad news comes out? It is due to the disenfranchised world of trading that has become the norm in most markets. Keep this in mind the next time you want to hop on the bandwagon. Is the company(ies) actually worth as much or as little as you think, or is it just society pushing you aboard?
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