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Shanghai Stock Market Falls Drastically

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June 26 marks yet another stock market plunge, reaffirming the riskiness of stocks. In fact, 76% of those who responded to a Bankrate survey said they were mistrustful of stocks because they were too risky and/or confusing. Friday morning in Shanghai brought one of the steepest drops in the market in years, which has shocked analysts, particularly since China’s stock markets have been some of the healthiest this year.

Two major Chinese market indexes failed at once. First, the Shanghai composite fell 7.4%, followed by the Shenzhen composite, which fell 7.9%. Once the two majors fell, other share prices followed quickly after.

Due to how well the Chinese market had been doing, investors flooded there, driving up stocks and creating a stock market bubble. Though financial analysts had been warning investors for months about that bubble bursting, investments continued to flow in. Stocks had hit such high numbers in such a short amount of time — enough to give every person on Earth $900 within just 12 months — that analysts knew the bubble was close to capacity. The past few weeks stocks have been rising and falling in quick succession, but the bubble has finally burst.

One of the key drivers of the market rally — and one authorities are trying to clamp down on — is buying stock with borrowed money. Would-be investors go through brokers to borrow money, and when their stock does well they pay that money back. But when the market crashes, there’s no money to pay the brokers back.

Banks and even some governments are now beginning to exercise more caution when it comes to investing in the stock market. The unpredictable nature combined with the snafus caused by issues such as borrowed money or government buyouts doesn’t make for a stable enough investment, especially for many smaller companies. In the coming years, we may see a pullback from the stock market, due to the amount of hits it’s taken over the last decade.

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