People often talk about a fall or a drop in the sharemarket. But it’s not as simple as that. The market doesn’t really rise and fall – it is simply a metaphor for people buying and selling shares. And the value of shares going up or down is a reflection of the number of buyers and the number of sellers.
If there are 100 sellers and only 50 buyers, the price of the shares will go down – there are less people to sell to. That’s a very simplistic way of looking at it, but this mismatch of buyers and sellers demonstrates what makes the market ‘fall’.
And as prices fall, people will start buying up the shares again – which will, in turn, make prices rise again.
Now, at the end of 2021, we know that March 2020 was when the market hit the ‘bottom’ of its fall, when it was down by 37% due to the Covid-19 pandemic. Everyone panicked and started selling their shares, hence the drop in the market.
It can be easier to understand this concept when thinking about property (or other tangible assets). During a low period, the cost of a $1 million house may be down and only valued at $600,000. But it’s still the same house. Nothing has changed. Yet the price tag is different. And if it was your house, you probably would try to avoid selling it at this point. But somehow people don’t see their shares in the same way – and they tend to panic and sell when their shares are down. And like the cheap house, this is when someone else snaps it up as a bargain.
Another good example is Woolworths. They didn’t lose any supermarkets during the fall of March 2020, but their shares went down. And when people eventually realised these shares were now a bargain, they started buying up, and the shares rose in value again.
This is the standard rise and fall – or volatility – of the sharemarket. It’s dictated by buyers and sellers, and highlights why it’s important not to panic and sell your shares when shares start to go down in price.