Tuesday, January 26, 2016
Reactions to the Current China Stock Market Problems Are Causing Even More Problems
What Does The Chinese Stock Market Crash Indicate?
As one of the largest global manufacturers in the world it is no surprise that many investors became incredibly fearful when the Chinese stock market closed down twice in one week. However, there are a number of factors that led to these shuts downs which most people are unaware of. First off you need to understand how incredibly flexible China's market is and the highs and lows can occur within a matter of minutes. One minute it is down 2%, then up by 3%, then back down by 2%, then down another 2%, and ends the day up by 4%. It operates on extremes on a regular basis, everyday. To help combat these extremes the China government puts a hold on the market trades when it is down by 5%. When stockholders begin to see the market dipping closer to the 5% they immediately start selling what they can before the hold comes into effect. This hold last for about 15 minutes, giving every investor the time to think about how they can sell the remaining stock they have. The selling just continues when the hold is lifted, when the market drops to 7% it gets shut down for the day. These holds are something that has been said to not continue for much longer. But as you can see, have a huge impact on stockholders choices.
The initial fear of the China market crash began to cause major concerns in mid-2015. The government again tried to prolong a crash by forcing big corporations shareholders to hold onto their stock market shares. They were not allowed to sell off any of their shares for six months. When that six months was up, not too long ago, huge blocks of stock were cashed in, resulting in the market crash. Again the major stockholders were told they had to stop selling off their stocks for another 3 months and are only allowed to sell 1% of their shares. See the slight repetition in this problem? Since China is considered a major economic stake holder many other stockholders in countries from around the world began to sell off their stocks fearing the effects. What they failed to consider in many instances is the long term factors. The simple question is whether you believe the company you have invested stock in will be around in 3 or 5 years? If you say yes, there is no reason to unload your stocks. Most of the influences that have caused the China market crash were results in its governmental involvement, not in its actual economy. Though the Chinese economy is in no means a stable state currently the fear that many global investor feel from the recent crash can just be overreaction.
It is actually a much wiser time to buy stocks then it is to sell. The China market crash is only affecting the global markets so much is because more people are selling out of fear. It is purely driven on emotions and not entirely on logic.