What if the stock market crashes?

Beginner Questions
#1

Hello,

Long time - no post - very busy making $$$ (finally) - working 25/8!

BUT - I have a question that nobody has touched on:

I spend most of my time reading, researching, etc. etc. and whether they be true or not and whether you are inclined to believe them or not there are a lot of very well explained and documented articles floating around about all of the stock market ‘bubbles’ all around the world and doomsday reports about just how the situation where we currently stand is almost exactly the same position where we found ourselves in 1929 (not me personally of course - not that old).

My question is: what happens to the dealers / brokers where our hard earned profits are sitting?

Please don’t tell me that because we are forex traders any stock market crash won’t affect us (I know of at least one person on this forum that will tell me this). It will affect us - my question is really - what is the worst that can happen? I mean it is fine to say that I am investing mainly in Gold, Silver, DAX, and any of the ‘Commdolls’ associated with these and that in the event of big selloffs Gold and the ‘Commdolls’ should do well BUT there would be little point in having HUGE profitable open positions with Gold and ‘Commdolls’ but would the dealers / brokers be able to honour these positions on close?

Regards,

Dale.

#2

I`ll give you my opinion, over in the states the dow is making new highs and higher highs, same with the ftse over here in the uk, where do you think the cash is flowing from?

a lot of it is from Japan, because of the cheap borrowing, so as soon as the jap economy looks on the way up you will see the dow drop, watch all the jpy crosses fall, ones that look heavily overbought (carry trades) such as gpbjpy and nzdjpy and eurjpy.

Regards

#3

If I’m not mistaken, the primary question asked was in regards to the security of our funds in our broker accounts. My answer to that would be so long as the account funds are segregated (and you definitely want to be trading with a firm which does that) the impact of a stock market crash would be nil. Your funds would be safe - in theory, anyway.

In terms of the impact on forex rates in the case of a stock meltdown, it would depend. If the decline where isolated to one country or region, then certainly the currencies involved would likely come under pressure as money flowed out. If, however, the destruction was global, then the impact on forex rates probably woudn’t be profound. After all, we trade the relative relationship between two currencies. If both currencies are simultaneously losing value, then the relative rate between them won’t really change much.

That said, there are always so called flights to quality. In times of global crises the CHF often attracts inflows, and historically so too has the USD. In the latter case it isn’t necessarily so much that people expect the currency to be strong, but there is often a big move in to US Treasuries, as well as in to gold, which is USD denominated.

#4

Hello - and thanks for input - most insightful.

When (apparantely not if) this happens we (forex traders) would make an absolute fortune BUT as I understand it this would make the USD fall as well not so? And - if this is the case - assuming that we had made HUGE profits - the dealers / brokers would have to cover those profits in USD i.e. it’s going to cost them a whole lot more USD to cover withdrawls - or am I not getting this? What then?

Regards,

Dale.

#5

Sorry John - I was busy typing at the same time as you were obviously and never saw your reply.

I agree with you about Gold etc. etc. BUT like I said - in my previous post - the dealer / broker may be USD based - is this not going to mean that they would have to fork out a whole lot more USD just to cover profit withdrawls if any i.e. I have open accounts at more than one place now and only one of them seems to take into account the fact that while you may be making profit on a particular pair they also calculate into your profit / loss the USD profit / loss on exchange so it has to make a difference.

Regards,

Dale.

#6

First question. What would happen that makes you think forex traders would be such big winners?

Second question. Why would dealers have to come up with more USD? If their customers are making all these profits, then it’s transfering through the broker from the market and in to the customer accounts.

Keep in mind that forex trading is a zero sum game. If a bunch of people are making money, a bunch of others are losing it.

#7

dpaterso,

I understand you are a good person and all, but [I]the sky really isn’t falling[/I].

rhodytrader,

You sure have a grasp on things, good posts.

#8

To Pipgod,

I do like your perceptive answer, it cuts through the confusion and really gets to the point! :smiley:

Here, in Australia, no matter what commodity you trade, be it forex, shares or other, you are required by law to have your funds in a major reputable bank separated from your trading brokers interests. The bank is usually nominated by the broker and it is a trust account.

This is a good protection in case of chaos. I feel very safe trading my shares in this way…and its going better than my forex!

Kind regards, Tymen Wortel, Perth, Western Australia.

#9

Well - thanks for all the smart a**e answers!

Do you honestly want to tell me that if the worst came to the worst i.e. the whole lot did a reversal (I’m talking about stocks) and came crashing down this is not going to have an effect on the forex markets (and the safety of your capital). If you don’t think that forex is linked in some way shape or form to stocks and commodites and you are trading forex in isolation then I can tell you that you are sorely mistaken - and if you think I’m talking s**t - then just do yourself a favour and have a look at Gold, Silver, Oil, and the major indices just for a day and compare them to what happens with the USD - and you won’t be so quite so smug.

I mean - do you think that it is impossible for the dealers / brokers to maybe, just maybe, be ‘on the wrong side of the fence’ if this were to happen? They can’t lose money and go broke? So - your capital is guaranteed? Has anybody actually gone to the trouble to find out exactly WHAT this means?

Anyway - the point is - and I’m not saying that it’s going to happen - I don’t have that kind of experience or insight - but there sure are a whole lot of other people (WITH that kind of insight and experience) that think so - and I just wanted other peoples opinions on the subject. Put it this way - I sure hope that if it happens - you are in a loss situation at the time and you have then lost nothing - because if you are sitting in profit situation at the time - I’d like to hear the stories from people who are having trouble getting their GUARANTEED capital and any profits on the table back from their dealer / broker.

Edit:

(Yes - I know I supposed to calm down here)!

Let me put it in easier to understand english:

Let’s say I have a Euro denominated account and I open an account with 10000 Euro. Let’s also say that over a period I make a profit of 1000 Euro. The dealer / broker now owes me 11000 Euro. No problem so far EXCEPT that the dealer is in the USA i.e. USD based. Now ‘the sun falls from the sky’ - and the USD becomes even more worthless than it is now - would you not agree that now the dealer / broker has to come up with a lot more USD to send me back 11000 Euro? And how many thousands of accounts are opened in this way? Are you telling me they have contingencies in place for this? It might interest you to know that on a particular day in May (this month) something like 429 000 Chinese opened accounts like ours IN ONE DAY. Do you think that China is the only place where this is happening (maybe not on the same scale but you get the picture).

And - OK - so I suppose I am answering my own question for myself - which was ‘Will a stock market crash affect forex traders?’ - I think so - if you don’t - well - good reasons and a bit of detail would have been nice - condescending anwers don’t quite cut the mustard.

Dale.

#10

Dale,

I’ll agree with you that there could be liquidity issues if everyone were attempting to pull their funds out of the brokers at the same time - a kind of run on the brokers. And certainly there could be issues if a broker fell afoul, businesswise, of other markets, but having a segregated account should keep your funds safe, if perhaps not immediately accessible. Since the vast major of brokers I’m aware of are not tied in with other markets, though, (meaning they aren’t also stock or futures brokers) I’m not worried about it.

In terms of converting EUR accounts to USD accounts or vice versa, and the like, you make the assumption that the brokers are not hedging that exposure. I would wager that the vast majority do so. As I’ve said in other places, brokers are not in the business of taking positions in the market, which is exactly what they’d be doing if they had outright risk implied by naked exposure to account currency basis. If those accounts are not offset in-house, then I’m sure they are hedged in the market. It’s worth checking with your broker on that. I wouldn’t want to trade with one who doesn’t do it because it would most definitely imply a risk to my capital.

But you haven’t answered the question as to why forex traders would profit so much in the face of a massive stock market meltdown. I’m interested in hearing why you think that would be.

#11

Hi John,

Sorry - I’ve been a bit ‘tardy’ about answering this one:

But you haven’t answered the question as to why forex traders would profit so much in the face of a massive stock market meltdown. I’m interested in hearing why you think that would be.

I just figure that it’s a no brainer if this REALLY starts to happen - I mean to say - as far as I figure it - all of the indices will go down and down and down - and Gold (all precious metals) will go up and up and up. Whether or not that falls under ‘forex’ trading as such - probably not - but that’s what I trade mostly (now) anyway. If this happens - then of course - the USD will be getting weaker - so there is another ‘entry’ point - and things like my beloved ZAR (South African Rand) will strengthen - not to mention the GBPZAR, EURZAR, AUDUSD, etc. etc. - and all of those DO fall under ‘forex’ trading. The trick of course is to be on the ride side of the trade which should not be too difficult if you are monitoring this stuff 25 hours a day (that’s 24 plus my lunch hour)!!!

What do you think?

Regards,

Dale.

#12

Really interesting disussion. :slight_smile:

I’m pretty sure most brokers hedge the positions, so that they take no risk, just milk you for cash.

Anyhoo fellas, have you been watching the markets lately? Shanghai closed 6,5% down, because of increased clearing comissions issued by the chinese government to slow down the psycho chinese economy. Dale mentioned something interesting. On average 300 000 trading (stock market) accounts are created in china per day. These are people with no clue on how to price a stock. The market is sky-high. The P/E ratio is now around three times as high as in European and U.S. stock markets.

The day there are no more chinese to fuel the bull, the market will crash. If not sooner. I’m pretty sure fear takes them soon. There is no way in hell I would by stocks in China now.

#14

That has nothing to do with the economy. It’s all about the stock market.

#15

I personally didn’t read any ethnic bias into the statement. Let’s face it. The vast majority of new “investors” are clueless, regardless of where in the world they are. I would love to be short that market when those people suffer their first round of losses and the realization that markets don’t go up forever sets in.

#16

If all the indices go in to freefall then I would actually expect the USD to hold up fairly well. In such a global panic what would people do? As you’ve noted, they would probably buy gold, which means there would be demand for the USD. Also, during times of crisis many folks move money in to US Treasuries as a safe haven. Again, you have USD demand. The CHF also normally gets a bid in that kind of scenario. I actually wouldn’t expect smaller currencies to do that well because they will be seen as higher risk during a time when folks are spooked and looking for safety.

That’s just what I think. I’m primarily a technician, so take it all with a grain of salt. :slight_smile:

#17

Wow. I never thought of the different scenarios that you brought about that would actually increase the demand for the USD during a crisis like this. You normally think with a drop in the stock market, the dollar automatically weakens with a sell off of the dollar. But like you said that excess supply would get sucked up by people having to purchase dollar for gold and other dollar denominated vehicles. Thanks for that insight.

#19

The impact of a stock market decline really depends on what market you’re talking about. If it’s just US stocks, then certainly you would expect pressure on the USD. If it’s a global stock market decline where all the major markets are falling, though, then what I said previously applies.

#20

No stress hobbit. I realise now that my post may have sounded somewhat arrogant. I was actually just, passing on what the media here in Norway has been telling me, something i forgot to mention.

The chinese government has said that they fear that people don’t know what they are doing, It’s not a long time since investor account number 100 000 000 opened. They have also said that what they are doing is a part of the cooldown of the chinese economy. Many people will argue that a stock market represents a great indicator for where an economy is heading. A “serious” crash in a stock market very often indicates a turn in the general economy. Though I don’t think that China will stop their economic growth yet. But that’s just my personal view.

The interesting thing will be to see if the chinese crash will have any effect on the other stock-markets.

#22

Good morning,

Here is another thought (that does not excite ME in the least but sure something to be aware of):

I just watched an interview and apparantely the last time a stocks ‘bubble’ burst Gold actually fell after a time as well. Why? Because a lot of (obviously major) players started selling Gold (taking profits) to cover margin calls on stocks.

Interesting - something I would not have thought of.

New lesson - every minute!

Regards,

Dale.

#23

Argh, sometimes market fundamentals are so frustratingly complex. Imagine how many other situations like this just waiting to burst. Reminds me why I usually follow a quantified system. :stuck_out_tongue: