Can somebody explain to me in plain words just how the stock market works & why at the moment it seems to be 'crashing' (if that's the right term?)
I've tried google to do a bit of reading but can't find anything that explains it quite how basic I'd like it to. Have read a lot about the crash in 1929 which was very interesting.
What I don't understand is why the market suddenly takes a turn? What makes that change, is it a gradual build up of events that then comes to a head? I understand the bull & bear market etc and that the market is constantly changing up/down and so on. But why suddenly a £50M loss?
And also I can't get to grips on what exactly the FTSE & Dow Jones is. Info I find says they're to do with indices, and while I kind of understand very basically what the retail index price is, I don't really understand it in terms of stocks & shares etc.
Anybody on here brainy enough to enlighten me?!
I don't know all the ins and outs by any means, but my understanding is this:
The FTSE is what is used to describe companies in the UK share market. So you get groups of companies - the FTSE 100 for example is made up of shares from the top 100 UK traded companies and there are others which collect data from different groups of companies. The FTSE as a whole will cover all of the UK traded shares. Different countries each have their own name, so the Dow Jones normally refers to the US index.
RPI is a measure of inflation, so how much prices are rising. It's nothing to do with shares, it's based on certain items that we are deemed to regularly buy, with prices being monitored and compared so it can be seen how they are changing.
Share prices are based on what someone expects to receive from the company in the future. So, say you were buying shares in a company, you'd expect to receive income (dividends) in the future, plus at some point be able to sell your share and get money back for it. Given your money would only come back to you in the future, you've got to account for inflation, so I might pay £100 now if in the next 5 years I was going to get £120 back, for example. Noone can guarantee my future income though, and what I'm hoping for is that I buy £100 of shares now and I get, say £150 or more back, which would more than cover inflation and I'd make a profit. But the risk is that I only get £80 back and so make a loss.
Noone actually sets share prices though - it's market demand that sets them. So if everyone wants to buy shares in company A, their share price will increase because if there's high demand, there will be more buyers than sellers. Same as what happens with house prices - if there's loads of buyers around, some will always be willing to pay a relatively high price, so you can sell to them for more, which pushes prices up.
Equally, if everyone wants to sell shares in a company, their share price will drop. Where there's lots of sellers wanting to get rid of shares, they need buyers, so have to drop prices lower and lower until someone thinks they will get their money back if they buy at that price. So, if I think I'm only going to make £80 in future, I might only be willing to pay £60 now, not £100. If everyone does that, the share price will drop to £60. That can happen very quickly if there's any bad news surrounding a company.
What we've got at the moment is a lot of people who are worried about what the future will hold. The Euro is unstable, some European countries are on the brink of going bankrupt, the major UK banks have just released some awful half year profit figures, and the US has record amounts of debt. What were previously seen as relatively safe investments (though nothing is ever completely safe), are now considered much more risky. There is far less guarantee now of companies making enough money to pay back investments, so people are willing to pay less and less for shares. That could go on for days or weeks or months, depending on how everyone reacts to news of individual companies and on wider issues. The US jobs market announcement today for example did increase prices slightly, or at least stopped them falling. Right now the market is just very sensitive. Current news is also tending to impact either most business sectors or at least large business sectors in the UK, like the banks.
If everyone could just sit there and do nothing, share prices wouldn't be falling like this. Some of it is certainly panic selling which makes everything worse, but one of the main problems is if you consider who are the major investors in shares. Certainly in this country, individuals are a drop in the ocean - the major investors are the pension schemes. And these pension schemes have to continue to pay pensioners, no matter what happens. They need a regular income, which they've been able to get in the past from the relatively 'safe' equities such as bank shares, as they've had regular dividends. But as company performance drops, so do dividend payments, so the pension schemes can't rely on the income any more. So they end up selling thousands and thousands of shares so they can move their money to somewhere they can get a regular income. That move would often be to bonds (government shares), but then we have Greece, Spain, Portugal and Ireland all in deep trouble, so previously very safe government stocks are not really safe either now.