Credit Crunch: What is it, and why are stocks hurt by it?
So what is this credit crunch we keep hearing on the news, what does it mean, and why are investors panicking over it? Simply put, it’s when money becomes hard to borrow. There are few signs of a “credit crunch” in today’s economy - if your an individual with no means of support, sure you’ll probably be the first to be victimized. In other words, your friendly neighbourhood mortgage shop might deny you credit (if they haven’t already gone bankrupt from defaults). Some institutions are also finding it hard to borrow money on favourable terms because of the shortage, and can not sell loans at decent profit levels, will take losses, and tighten up their lending schedule.
But as of yet there still seems to be plenty of cash moving around; and anyone with a decent chance of paying it off, should receive a loan at a reasonably a low rate. The central banks around the world have also provided this assurance by injecting cash into their systems during the tough times. So why are the markets still plummeting? Simply put, market stupidity.
Investors are panic selling. Why are they panicking? Because they are unsure; unsure of how many hedge funds will fail because of this, how many banks will take massive writedowns, how many consumers will lose their homes. And another side-effect, or further creation of panicking, is only more panicking. I panic, you panic, he panics, she panics. But what we all need to do is… relax.
Think logically, don’t follow the herd. When stock markets tank like they have been the last couple of weeks, it means there are more sellers than buyers. Yet for every panicking, desperate seller, there is always a happy, smiling investor on the other end. Are they smiling because they are stupid, looking to commit suicide, or don’t know about the credit crunch? I doubt it. They are probably looking for quality stocks at a bargain price.
The point is, you have to do your analysis. I’m not saying to go buying like there’s no tomorrow; but take the emotion out of trading and have a plan (write it down if it helps). Have a predetermined buy target, sell target and stop loss target. Panic selling and impulse buying are some of the worst enemies of traders. Investors always go too far. Throughout this crisis, companies will probably sell at great deals. Look to see what best suits yourself, buy, then wait for herd to come running back, sell, then count your money…
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