FTSE etc. ups and downs

Cliddy

I'm no economist as you can tell by my question...... why is it that when countries,/the world/companies etc. suffer problems and people/organisations SELL their holdings (often resulting in billions of pounds of movement) that it always results in a general decrease in results everywhere. e.g the current crisis(s) Where does all this money go ? If it's reinvested elsewhere (the obvious answer) why doesn't it mean that the general world situation remains static as a result. e.g sell in Europe reinvest in China. This doesn't seem the case ???

Really2

At a guess,(as I don't know either)

Sell, pay down debt, Money goes to bank balance sheet instead of being re-invested.

Lots of companies made mega $$$ buys in the boom on credit. That credit needs paying back, a lot of the time on over values assets (due to bust).

Busts suck money out of companies by repairing balance sheets through bad debt, asset value write downs etc.

Company sells X, repays loan and fixes balance sheet hole.
Bank receives repaid loan, fixes balance sheet losses = less to re-invest than boom.

Generali

Cliddy wrote: »

I'm no economist as you can tell by my question...... why is it that when countries,/the world/companies etc. suffer problems and people/organisations SELL their holdings (often resulting in billions of pounds of movement) that it always results in a general decrease in results everywhere. e.g the current crisis(s) Where does all this money go ? If it's reinvested elsewhere (the obvious answer) why doesn't it mean that the general world situation remains static as a result. e.g sell in Europe reinvest in China. This doesn't seem the case ???

The piece of the jigsaw that you are missing* is that for every seller there must be a buyer. If there isn't, who does the buyer sell to?

To give a simplified example, imagine a world with 2 people, you and me. You have 100 shares in Generali Enterprises and I have $1,000. You offer to sell me your shares in return for $600 and I decide to go for the deal. In this imaginary economy, the total assets are 100 shares in Generali Enterprises and $1000.

Now I have the 100 shares, you have $600 and I have my remaining $400. However the total assets are still 100 shares in Generali Enterprises and $1000 ($400+$600 = $1000). Nothing has changed except who owns what.

The reality is that this is pretty much what happens on stock markets only billions of decisions to buy and sell are made every day rather than one or two. People, funds, banks and companies decide to change their investment strategy and trades are struck on the back of that. The net impact of all that buying and selling is basically nil.

The slight caveat is that in the Real World, there are costs to buying and selling. There's 'the spread', you'll probably have to pay some sort of brokerage fee and you might have to pay a tax (eg stamp duty) too.




*The reason I suspect that you are missing that piece is because of the incredibly sloppy way that financial markets are reported. You'll regularly see reports saying something like, 'Markets were weak on bad jobs data from the US with more sellers than buyers today'. The only reasonable response to that is, 'Ok Dave Cheese-Trousers, who did the sellers sell to then you goddam Gouda brained buffoon?'.

Mr_Mumble

Cliddy wrote: »

I'm no economist as you can tell by my question...... why is it that when countries,/the world/companies etc. suffer problems and people/organisations SELL their holdings (often resulting in billions of pounds of movement) that it always results in a general decrease in results everywhere. e.g the current crisis(s) Where does all this money go ? If it's reinvested elsewhere (the obvious answer) why doesn't it mean that the general world situation remains static as a result. e.g sell in Europe reinvest in China. This doesn't seem the case ???

When equities fall in value because of wider concerns over the economy (aka "macro environment") the sellers will traditionally put the money into bonds, often government debt which is considered safer. The cost/pricing of US, UK and German debt is at record highs (the price of bonds being inverse to their yields - i.e. the yields are at record lows). All FTSE 100 companies combined have a market capitalisation of around £1.1tn while Britain's gilt issuance is approaching £1tn (though around one-quarter of that amount is 'owned' by the Bank of England via quantitative easing). By comparison residential housing in the UK is valued around £4tn.

Since equity holders are on the bottom rung of the corporate pyramid they have most to lose if companies make bad decisions - the creditors, taxman, lawyers and pensioners will get paid out before the shareholder if there is some form of insolvency. The equity markets are a good overall barometer of economic well-being because it is the riskiest of all traditional investments.