It is no epiphany that money is tight for college students. The high sales of Natural Ice at the Sav-On near campus can attest to that. I personally have a change stash in my desk that I delve into on Sundays in an attempt to purchase the most 39-cent cheeseburgers that I can afford.
Because of this shortage of funds, students scramble to find money from any source possible. Some people subject themselves to scientific testing for a few extra dollars. Many of us have jobs to pay for extraneous items that financial aid and Mom and Dad don’t pay for. Another popular place to try and find a little cash, at least in the last couple of years, has been the stock market.
These days are now over. I’ll admit it. Since I was a junior in high school, I have invested small to moderate amounts of money in the stock market, and I know that I am not alone. I figured, as I am sure that many of you did, that the market keeps going up and there is next to no risk to being in the market, especially the technology industries, where price per share ceilings didn’t seem to exist.
We all made a stupid move, but it wasn’t entirely our fault. We were born in exactly the range of time that put us in our late teens and early twenties, when the market was flying to its highest levels. We were led to believe that the rules of economics didn’t apply to us; that prices of stock shares no longer had anything to do with earnings and that the values of Internet companies could continuously rise, even without a product or anything resembling a profit. It was a new economy with new rules, and we were sure that we were going to benefit from it.
We were oh-so-wrong.
What caused this misconception that sent buyers into a frenzy? Ironically enough, I would say that the blame can most correctly be placed in the laps of the buyers themselves.
Cheap computer trading on Web sites such as E-Trade has made other brokerage houses lower their per-trade prices. All of this has made entering the stock market more accessible to many people over the last few years. For most of you, this is not new information. What most people don’t understand, however, is the new dynamic that this introduces into the realm of stock trading.
With more novice investors in the market trying to make a quick buck, two things happen. First of all, variances of stock prices begin to go way up. This is simply because of the fact that more people in the market means more capital in the market, which in turn brings the possibility of bigger swings.
Secondly, more novice investors means that the mob-like reactions to certain phenomena have an even greater effect on prices of stocks.
This is my theory, and theories need to be tested with empirical evidence, so let’s take a look at the numbers.
It is easy to see that the variances in the prices of the stock exchanges have gone up significantly over the past few years. As little as five years ago, a 20-point move on the NASDAQ would be considered a volatile day. Now we don’t even flinch unless it moves at least 100 points.
For evidence of the mob-like activity I spoke of above, all you need to do is look at the dot-com craze that is just now coming to an end.
By all the laws of economics, there was no reason that these companies had any business being priced so high. Stock shares are simply claims to the future earnings of companies, and most of these companies had never made a profit.
How the craze probably began was with one investor willing to take a chance that he would eventually make a profit, then people began to follow him. From there, novice investors saw the prices of these stocks continue to rise, so they decided to buy for themselves. When professional investors realized that people were willing to pay almost any price for these stocks, they decided to buy and sell later when the price would inevitably be higher.
Unfortunately, we all know how this story ends. As prices began to fall, novice investors got scared, mostly because they had never experienced that before, and prices fell more until they got to the depressed and depressing levels that they are at now. We bet on the laws of economics being suspended, and they were, but not for long enough.
Is there any good news to this sad series of events? Fortunately, there is.
First of all, there is a lesson to be learned. That lesson is that it is probably better to go get your brain hooked up to electrodes for spending money than to venture into the stock market. There is a reason that every investor who knows what he is doing suggests holding assets for the long term and not using any money in the market that you will need any time soon.
I think over the past couple of months we have been taught a lesson as to why these investors have this strategy.
The better news, for people that have disposable money right now, is that the large variances brought on by novice investors many times lead to a market where stocks are priced below where they should be. Are we in one of these times now? Possibly, and if we aren’t yet, I can almost guarantee that we will be soon. This sets up a great opportunity for people to make a killing in the market. So if you have extra cash, by all means go for it. As for me, I think I will stick to digging though my change drawer.
