Why stocks can Crash.

Why stock price can go lower?

It's very simple; There are more sellers than buyers.

But then, why stocks can CRASH?

1. Fund manager's performance:
Fund (money) manager is hired by investors. Investors shop around to see who can generate highest profit. So when the stock, that a fund manager has in his portfolio, goes down to a certain point, he/she has to sell to keep the asset. It's too risky for him to hold onto the stock to rebound.

2. Margin calls:
Many traders use margin (borrowing power) to purchase more numbers of shares than what they can buy with cash they hold.
Generally, day traders can have 4x of cash margin purchasing power, while margin traders can have 2x of cash purchasing power. i.e. If you have 3000 dollars in your margin account, you can buy 6000 dollars worth of company's stock.

The problem is MARGIN CALL; request of liquidation of stock because your cash (base of borrowing power) is now lower than what it used to be mostly because the stock price has decreased.

Let's go back to the example. You had $3000 cash in your brokerage margin account (You must have more than $2500 to apply for a margin account). If you utilized your full margin purchasing power based on $3000, and purchased $6000 worth of a company's shares at $100/share, you now have 60 shares ($6000/$100)

But something bad happened, and stock price went lower 10% to $90/share.
Basically you lost $600, and that made your total account value (cash) at $2400.
Now your maximum purchasing power (in your margin account) is $4800, instead of $6000 before.

Your brokerage will notify you with a Margin Call, asking for either sales of 7 shares (60 shares at $100 - 53 shares at $90) or depositing $600 to your brokerage account.

*53 shares = $4800/$90, rounded number.

7 shares out of 60 is more than 10% of what you had actually.
Now if you do not have $600 to deposit into your brokerage account, you will choose to sell 7 shares to meet the Margin requirement.

You will also more likely sell your 7 shares, than depositing $600, because the stock is going lower.

This creates crash.


My point is to be careful when you purchase stocks with margin power.
If you are novice trader, you should just keep your account as a cash account.
On top of that, you have to pay interest to the brokerage when you use margin power (borrowing money) too.

Chinese Facebook, YouTube, and Google.

Well, everyone knows Baidu now (BIDU).

After Chinese government and Google had trouble with censorship, Google retreated from Chinese market and Baidu took over the market share where Google used to have.

BIDU made split and it is still growing strong.

Youku, Chinese YouTube site, IPOed last Dec, 2010.

YOKU had mediocre move in the beginning months then has skyrocketed suddenly.

Now, RenRen, (RENN) Chinese Facebook, IPO today.

It aimed to start at 14, and opened the market with 20.

YOKU and RENN financial is crap. They just look very bad bet for now as they are losing so much money every quarter. But the gap of losing money is closing.

Where Facebook is not allowed, RenRen is taking social interaction market in mainland China.

I would say its direct competitor in mobile social interaction is WangWang.

Well, they both are growing strong, mostly because Chinese market itself is growing fast.

(Pie is getting bigger, while RenRen is getting bigger cut in it.)

Let's see how RENN does for the next 3 months.

Why CORT looks attractive.

Corcept Therapeutics (CORT) is one of the pharma firms I've been following over months.
The firm expects its III trial on Corlux for Cushing's Syndrome (Wiki on Cushing's Syndrome http://en.wikipedia.org/wiki/Cushing%27s_syndrome) this month.
If the data is positive, the upside profit will be pretty handsome for long position.

According to Alan Leong of Minyaville, "Cushing’s syndrome occurs when the body is exposed to excessive levels of cortisol....symptoms will immediately resolve upon the administration of Corlux..." http://www.minyanville.com/investing/articles/corcept-therapeutics-big-pharma-biotech-sector/12/9/2010/id/31614

You know, I have seen many drugs to mitigate depression and all, but most of them had strong side effects of weight gain. Many cancer patients do take them as well as psychologically-difficult patients. So you know the market is huge; "Antipsychotics were the top-selling class of drugs in 2009 with worldwide sales totaling over $14.6 billion. These powerful drugs can really help patients, but the help comes at a cost of significant weight gain and increased diabetes risk."

So now you see how CORT's Corlux can be used to mitigate this weight gain, what would the big pharmas say when the result on Dec is positive? "Hmmmm very attractive item this small 300M or so company has. Darn it, I spent over 1 Billion to settle the lawsuits on side-effects of my antipsychotics drug."

Well, many analysts said, "usage for 'subclinical' Cushing’s syndrome, expected peak revenues range from $50 million to $150 million." So what will happen to its 300M market cap?

You guess.

ps) I know, my writing on CORT is horrible, its rather commentary. But I had to write to inform yall.

Useful web documents:
Orphan Drug: http://biotech.about.com/od/faq/f/orphandrugs.htm
Piper Jaffray target CORT at $7/share: http://www.benzinga.com/analyst-ratings/analyst-color/10/11/619004/piper-jaffray-initiates-coverage-on-corcept-theraputics
Dr. Kimberly Lee on CORT: http://www.twst.com/yagoo/KMBERLYlee1q.html

GLD, CPO, BAL

For my friends on SimplySpeculation who are in stock investment. Here is one economic think I can share: Our Agriculture totally got ruined by horrible weather in summer. This means cotton and corn are very limited. Low supply means higher price. Higher price means, higher profit.

BAL: (cotton) Path Dow Jones-UBS Cotton Subindex Total Return ETN

CPO: (corn) Corn Products International, Inc

GLD: (gold) SPDR Gold Trust (ETF)

You decide.

Remember, it's not just us, American, had trouble with weather and harvest after.

Chinese who are one of the largest importer of US cotton and US corn, got in huge trouble as well.

This means higher demand. (like you need explanation)