Ask the Expert - CFDs When there’s panic and investors sell, who are they selling the shares to? Christopher Gore, Senior Sales Trader, IG Markets
I would love a response to what is probably a really basic question, but one that I haven't been able to find an answer to. My understanding is that for every seller for any share listed on the ASX, there is a buyer. When share prices drop quickly- when there is "panic" in the market- (like recently say with MQG or BNB), who (in general) is buying? I can understand that some buyers might be people who have shorted the particular share, but otherwise, are there really just as many buyers as sellers?
Today's expert: Christopher Gore, IG Markets
In a fluid market place, we expect a variety of participants at any one time who wish to both buy and sell the instrument or stock in question.
As mentioned in your question, recently we have seen extreme downward pressure on stocks such has Macquarie and Babcock and Brown. However, we can assume that even though the stock may be falling through the floor, a healthy number of participants exist who see value in the business. For many investors this is an integral part of their trading strategy. Many view a falling stock as an opportunity to buy at levels which appear to be over-sold, taking advantage of the depressed share price of what they believe to be an otherwise fundamentally sound business. A bid to purchase is then placed at the investors desired level, which may be well below the market in the hope of securing a perceived bargain.
These two companies provide a perfect example - with the financial crises surrounding heavyweight US banks, Australian investors have drawn similarities to our own investment banks, prompting negative sentiment, which in turn creates downward pressure.
Every investor who wishes to sell their stock must make a decision to either offer the stock at the price they would like to receive, or offer the stock to the best bid in the market. So assuming a trade takes place, for every seller there must be a buyer! Downward pressure is created when the volume of stock offered for sale is greater than the volume of stock being bid for, sending the price lower. In practice we don’t always see an orderly easing of the share price to lower levels, and on occasion “panic” selling can result in a swift sell off, especially in times of adversity where nervousness may result in low liquidity on the buyers' side.
Disclaimers: The views expressed in this article are those of Christopher Gore, a representative of IG Markets and is not intended as general advice. This does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.
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