Stock Market Panic!

An investor takes an amount of money out of his pocket and buys some stock. He thinks he still has that much net worth, but all he actually has is equity paper instead.

If the price of the stock goes up he thinks he has more net worth. He can even use the stock as collateral to borrow more money to buy more stock!

Meanwhile, the original money he spent to buy the stock goes to the person he bought the stock from. The stock seller might put the money in the bank where someone else will borrow it or he might buy again the same stock himself, helping to drive the price up some more.

Now the person he bought the stock from has the money he got from the first one he sold the stock to ...

And so on and on and on ...

Add up the money that everyone thinks they've got and it's far more than what's really circulating. As long as the demand continues everything is fine and the apparent wealth keeps on growing!

But what will happen if a significant number of people all want to make a withdrawal at the same time?

And why do speculative markets always end in panic selling?

Continue to the Next Page