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.
