Re: Signs of recovery appearing, but not in CanadaMay 14th, 2009
So how did this legend of people jumping off the buildings start? No doubt some of them did jump off the buildings after the 1929 stock market crash. But they were few in number. Let me explain how that can happen.
It happens if you borrow to invest. Let us say that my total assets (including my house, cars etc.) are 2 million $. Using that as collateral, I take a loan of 2 million $ and invest that in Royal Bank or other stocks.
Now, why would I do that? Let us say in one year stocks go up 10%. That means I have made 200,000 $. Even after paying bank the interest on the loan, I will have a handsome amount left over. And it didnít cost me a penny, I used somebody elseís money to make money.
But let us look at the flip side, stock market crashes to 1/10th of its value. Then my stocks become worth 200,000 $, rather than 2 million $. So when time comes to pay back the loan, I donít have the money, selling the stocks will raise only 200,000 $.
So I will have to sell my cars, my house etc. to pay back the loan, I will have lost everything. In that case I may consider jumping from the top of a building.
But as I said, such instances are rare. If stock market crashes, most investors will lose the money they invested in stocks and that will be it. Their other assets will be untouched.
And even the money they "lost" in stocks will only be a "paper loss" unless they get really stupid and sell. But like you say, anyone with even a shred of intelligence doesn't have all their money in equities.