“If I buy a stock for $100 a share and it loses $60 in value when I sell it, I still have $40. I still have cash to invest that will increase demand for something else.”
Wow, there are so many holes in that argument it is difficult to know where to start.
First of all, that only works if the guy bought his $100 of shares with cash that he didn’t need for anything else. However, if, as is the case with a huge number of Chinese investors, he actually borrowed $80 to buy the shares not only does he not have $40 he is actually negative $40 to some money lender. That is not a pleasant position to be in.
Second, you imply that the investor will simply shrug his shoulders, thank his lucky stars he still has $40 and look around for some place else to invest his cash, maybe Argentinian railway bonds, Nigerian oil minister’s widows or pork belly futures. But he won’t will he? His fingers will be so badly burned he will be stuffing his cash under the mattress and telling his wife to cancel the foreign holiday, sell the new Honda and take the kid out of that fancy private school. All that has a knock on effect on the economy.
Third just like the nervous investor the companies themselves that see their stock price drop by 60% will suddenly start cancelling all those plans for expansion and laying off workers by the thousand. Furthermore the banks that lent them money for previous expansion will be making phone calls asking about how they plan to repay that money.
If even in a country where the government threatens you with the midnight knock on the door if you sell stocks, half the shares on the board have delisted themselves and the directors of the remaining companies have been ordered to buy their own stock the bourse slumps 8.5% in one day then I think you can safely say you have a major problem whether you want to quibble over whether or not it is technically a crash.
Although the Chinese are notorious gamblers, they are also savers. So, you'll have to pony up citations for that "huge number."
Second, you imply that the investor will simply shrug his shoulders, thank his lucky stars he still has $40 and look around for some place else to invest his cash, maybe Argentinian railway bonds, Nigerian oil minister’s widows or pork belly futures. But he won’t will he?
You have to put it somewhere and that has a beneficial effect for somebody. I seriously doubt many Chinese investors are enamored with mattresses. Most of the money isn't small investors.
Third just like the nervous investor the companies themselves that see their stock price drop by 60% will suddenly start cancelling all those plans for expansion and laying off workers by the thousand. Furthermore the banks that lent them money for previous expansion will be making phone calls asking about how they plan to repay that money.
So? When a crash happens, the serious money doesn't evaporate; it moves and fast.
If even in a country where the government threatens you with the midnight knock on the door if you sell stocks, half the shares on the board have delisted themselves and the directors of the remaining companies have been ordered to buy their own stock the bourse slumps 8.5% in one day then I think you can safely say you have a major problem whether you want to quibble over whether or not it is technically a crash.
From the article: