I am not sure if anybody heard the news about the Chinese Stock Exchange (CSE) booming in May and June, the index figure of the market has reached 5100 points from 2300 points within around 30 days.
The market value has been doubled. This means whatever stock you bought in that 30 day period; there is a great possibility that particular stock would have doubled or more, in its share price from when you purchased.
The Chinese have fallen in love with the stock exchange. You may have viewed recent news casts showing many of older Chinese people with their smart-phones all making notes and buying and selling.
There is a regulation of CSE that the total increase or decrease scale of a stock should be no more than 10% each day. For instance, a stock is $10.00 when the market opens; when the market closed, the price of the stock shouldn't be more than $11.00 or less than $9.09.
In that 30 day period, some of the stocks' price increased 10% each day for many days. So many investors saw this as a great and rare opportunity to earn a good fortune. However, even though many spent all their available money to buy stocks, they still don't think that's enough. So they start to use securities loan and leverage.
CSE only allows this twice - leverage securities loan to be used, but there are speculators could find 4 times to leverage and use it to buy stocks. If this 4 times leverage is used, when the stock price increased by 10%, eventually 40% value has been earned. For instance, an investor has $1000.00 as capital, and he bought 100 units stock A at $10.00 each. When the price of stock A increased by 10%, $100.00 has been earned. If 4 times leverage is used, $400.00 would be earned. On the other hand, when stock A's price decreased by 10%, then $90.91 is lost. If 4 time leverage is used, $363.64 would be lost.
During that 30 days market boom period, most of the investors focused on the price increasing, they were so confident that the stock market would not go down, they even believed the index figure would reach 10,000 points in the near future. Without seeing the increased risks in the market, they put all their money in to it.
The wages, the pensions, and the money they earned from stock market, the money they borrowed with their house as securities... Everyone looking forward to getting super rich while looking at the big screen of stock market full with red (Red means price increasing in CSE).
However, from middle of June, the CSE collapsed. Within that next 2-3 weeks, the index figure dropped to around 3700 points as at 7/07/2015, the stock market value decreased by 25%. There was more than one thousand stocks' price decreased reached 10% each day and for many days. Most of the investors lost what they had earned from the stock market since the boom, indeed a roller coaster experience.
One of my friends in China sent me a video clip last Sunday, which is about an investor suicide who jumped from the 23rd floor. This person used 4 times leverage and lost his capital after 3 days continuous 10% price decreasing of his stocks, and his capital was the house he and his wife would live after retirement. He felt so shameful, and made a rash decision to end his life in this cruel way, leaving his family behind.
I am sad to say others too have acted this rashly. I have heard first hand there have been more investors' situation alike that man. However, if we treated investing in the stock market objectively, investors should be aware of the risks. Maybe the investors would not use a leverage system trying to earn more; maybe they should leave the stock market having earned quiet a sum; they are so many maybes...
Once we as human beings overcome such greed deep inside our hearts, we might just stop such tragedies. Surely this is Bible 101. Proverbs chapter 3 verses 5 – Trust in the Lord with all your heart, and lean not on your own understanding."
Oscar Duan is from China, he has an accountancy degree from University of Hertfordshire (UH) International campus in Malaysia, and has undertaken further accountancy studies in Australia for accreditation here. He is married to Heyley.
Oscar Duan's previous articles may be viewed at http://www.pressserviceinternational.org/oscar-duan.html