How Much Money is in the Stock Market?
A surefire indicator of change in the stock markets is how much money is in the stock market. It usually implies that those who had so far been investing in cash deposits and bonds and similar cash based investments are now taking the plunge and investing in the stock market. If individual investors can follow up on these trends and use them to their advantage, they can make a pretty penny quite fast.
Better Stock Returns
Investors, who are venturing out into the stock market for the first time, often venture into investing when the market is on a high and is extremely bullish. They hear of investment success stories when the economy takes a turn for the better and then they want to get rich too as soon as they can and therefore they invest trying to maximize their returns. However they often don’t invest as wisely as they could have owing to their inexperience. They usually tend to go for the so called ‘hot’ shares, which are already publicized in the media by stock market pundits and then these already popular shares further increase in price due to the increased demand. Such increases in price due to demand leads to too much money chasing too few scrips and that often leads to a sudden turn around in the market depending on how much money is in the stock market.
A very common example of this is the dot com bubble which increased immensely in the late 1990s and then boomeranged and brought down the entire economy. During the peak period of the bubble, there were too few seller and too many buyers, the resulting scenario jacking up prices beyond belief. There was a lot of money which desperately tried to create a demand for something to buy. When professional investors started pulling out their money, it was because they realized that they were paying more for stock which wasn’t worth as much as it claimed to be. They then sold off as quickly as they could in order to exit out of an unhealthy market and then the entire market crashed bringing about the entire dot com bubble to burst.
There are often large booms in the economy depending on how much money is in the stock market, which turn around and soon crash. However it doesn’t mean that you shouldn’t invest in a market which has a lot of enthusiasm. You should however be careful of what you invest in and think twice about paying more that the shares are actually worth. For however enthusiastic a market might be, it will never retain its initial enthusiasm from when it starts to take off.
If you do plan on investing, you should do so with a lot of financial planning, taking into account your current income, expenditure and savings. You should never invest too large a portion of your savings so that you can always regain your financial footing after some time even if your decisions go wrong. You should always maintain contingency funds for financial emergencies and never dip into these for investing in the share market. Neither should you depend on making a profit in the share market for your primary source of income or for money during emergencies.
You must always have a back up plan. For those of us who own homes, we know that furnaces break down, roofs need repair and other unexpected things come up all the time. It is crucial to your overall financial health to have contingencies in place for these types of emergencies.
While the overall goal in trading is always to show a profit, it is critical that you not depend on these profits to handle emergency situations that come up. If you were to lose your job tomorrow would you be able to continue to maintain the lifestyle you are leading today for a period of time (six months is typically a good rule of thumb).
