Primer on stock market turbulence


Friday, January 15, 2016

OIL touched $28 per barrel today. End of week report will be published tonight after Canada and USA finish trading.

You now see the turbulence on the major markets. There are several factors. Let me address the most obvious ones (and, I do not know much).
1) Geo-political issues. For some reason some people are dead bent on killing people. This affects Supply and Demand. Well, dead people cannot buy things!
2) Commodity prices. Turns out Oil is a commodity upon which many countries calculate their budgets (Canada included).
3) God made heaven and earth. China made the rest. Wait one second..did China devalue its yuan twice in a month?
4) Lenders, funders and donors may have woken up to Human Rights. Did your country by any chance ignore these key things like justice for all? Dunno.
5) The biggest consuming countries of what you sell might be going theough an aging population and there are not enough young ones (Millennials) to buy as much as in the past.
Margin calls are simply a call from your broker that the stock, option or currency is falling and if you want to keep it, deposit more money into your account.

The above leads to stop sell and stop buy.

Generally when you buy something, you set a limit of how much you are willing to lose.

Never trade with money you need to pay the bills. So let us say you bought Amazon at $600 hoping it would go up and you get rich but you were smart enough to put a condition (stop sell) in your account that if it trades at $575 you want out. STOPS ARE AUTO TRIGGERED.

Hey, if you did the above, you are ought of Amazon with a loss of only $25 a share. It is now trading at $566. Always use stops. Some people bought this one at nearly $700!

Then you have the margin squeeze. Selling what you do not have. Your broker lends you stocks and you sell at $600 hoping to buy back at a lower price and pay back the stocks.

Your broker does not care about the money but the number of stocks. If the stock rises, you lose. So with stop buys (you are buying to give your broker back the shares you sold which you borrowed, aka shorting), others who did it also rush to buy before they lose too much money.

If you did like them, you set stop buy. But a stop does not mean you get the price you set. It means when that price is hit, you get out. Sometimes the stops are so many it triggers supply and demand leading to people running for the exit door and hence a squeeze. MARGINS are used for all these things.

The norm is 3 for 1. If your account has $10,000, you can buy up to $30,000 worth of stocks or options. Next week we will look at forex as the margin for that can go as high as 400 times.

Martha Leah Nangalama
Moncton, Canada

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