Introduction
When it comes to the stock market, even the slightest correction can lead to widespread panic and rumour mongering. In this blog post, we will analyse the reasons behind this panic and the subsequent rumours associated with an imminent market crash.
The Cyclical Nature of the Stock Market
One of the key factors contributing to the panic in the stock market is its cyclical nature. The market is never a one-way upward trajectory. Corrections are necessary when price-to-earnings ratios become unsustainable, leading to a market correction.
These corrections primarily affect operator-driven stocks that have experienced hype and unreasonable price appreciation. These stocks may correct significantly, sometimes by 50-75%, to reach their correct valuation.
The Trapped Investors
Who gets trapped in the above situation? It is often the gullible and uninformed investor. Certain sections of the market engage in an invisible but concerted effort to create hype for specific stocks that do not match their fundamental value.
The persuasive pitches of ‘fin-influencers’ and their blind followers result in unnecessary hype and artificially inflated stock prices. Operators take major positions in these stocks when no one knows about them, acquiring them at very cheap prices. Once the desired price, decided by the operators, is achieved, they dump their positions, leading to a crash in the stock price.
The Impact of FOMO
Unfortunately, due to the fear of missing out (FOMO), the majority of first-time and unaware retail investors enter the stock market when it is at its peak. They see others making quick profits and are lured into buying stocks without conducting proper research or understanding the fundamentals.
These investors are often the ones who suffer the most when the market corrects itself. They panic and sell their stocks at a loss, further fuelling the rumours of a market crash.
Conclusion
It is crucial for investors to understand the cyclical nature of the stock market and not get swayed by hype and rumours. Conducting thorough research, analysing the fundamentals of a stock, and consulting with financial advisors can help investors make informed decisions and avoid being trapped in the panic and rumour mongering.
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