Wednesday, April 23 2014, 09:23 AM MDT
Good Question: Why Are Investors So Jumpy?
By Matt Gephardt
Photography by Brian Morris
Edited by Ryan Malavolta
(KUTV) 2013 has been a good year on the New York Stock Exchange; the Dow Jones Industrial Average is at a record high. But last week, investors briefly saw a plunge after a tweet went out to the Associated Press' nearly 2 million followers. “Two explosions in the White House and Barack Obama is injured,” the tweet read. In the next two minutes the Dow tumbled 147 points.
The president is of course perfectly fine. There were no explosions at the White House. The A.P.'s Twitter account had been hacked. Still, that single fake tweet had un-nerved the markets and real life money was lost.
It all prompted Julie to write to me asking, why does bad news often result in an immediate drop in the stock market? It's a good question.
Raymond James financial advisor Bret Tillman says there are two factors of what causes the markets to rise and fall. One of them is profits. The other is emotions. Tillman says that, historically, when people are sad or scarred they invest less so when there is bad news the major money managers try to dump stocks as quickly as possible. But he says it's often not a human being making the rash decision.
“Computers will read the headlines and if certain words are triggered it will automatically sell and those automatic sells cause a huge down turn in the market,” Tillman said.
Many of the largest investment firms have computers right inside the New York Stock Exchange. Those computers are programmed to automatically sell at certain triggers and something triggered the computers to sell after the bogus AP tweet.
Tillman says that to see a market drop that big that fast would never happen from the small traders.
"It's these larger investors who are managing trillions of dollars,” he said. “When they make trades, and especially these automatic trades, they're huge. They're immediate. They're impactful."
These computers are very controversial because they give the huge players an obvious advantage over an individual trader who might buy and sell a little here and there during the day.
This is not the first time the computers have overreacted. In 2010, a glitch in one computer caused that computer to start selling stocks. Other computers freaked out and started selling, too.
If you have a good question you would like me to answer next Friday, you can reach me at (801) 839-1250 or firstname.lastname@example.org.
(Copyright 2013 Sinclair Broadcasting Group)