Crashes occur because of speculation on over-inflated valuation of companies and commodities, and more specifically credit concerns.
By Daniel at 20 December, 2008, 6:09 pm
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Actually, short sellers have never been the major moving force that caused all the crashes, despite what the media might try to spin. Take any given stock, and look at the short interest, you will see that the total short interest is often barely equivalent to the volume of 1 trading day.
Short sellers are more like the antibodies of the market. They identify false hope and manipulation contradicting the actual economic fundamentals, and they try to use it to hedge their livelihood against the downturn.
The true reason for crashes are large shareholders selling their shares to take profit, knowing that the market will not recover in a while. It is the same for every single bear market.
When large institutional holders buy stocks, they buy early since they have better access to information than any of us individual investors. Companies’ insiders who started from the IPO generally got their shares for a deep discount as well. The only way for them to take profit is to sell at the top after individual investors have bought in for half a decade of bull market, and they will keep selling as long as there is still weakness in the economy.
In crashes many institutions are forced to liquidate positions in crisis management mode and out of their control. Most do not sell at the top and are lucky to break even. Which in a crash is a blessing.
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