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Brexit aftershocks #finance

After the stock market was trashed last Friday we had the aftershocks that saw banks and house builders losing up to 30% of their market capitalisation. Then, the dead cat bounced, the market recovered a little this week. So why did it crash so spectacularly on Friday and what can we learn from it? We have to understand the role of market makers in all this. We need to understand the Brexit aftershocks.

brexit aftershocks

There are small investors dealing in the stock market and there are big investors who buy and sell and more importantly set the prices. They are market makers.

Shopkeeper

Imagine the market maker as a shopkeeper with a stock of shares under his counter. He buys at one price, the bid price and sells at a slightly higher price, the ask price. The difference is the spread, which is his profit. So you would expect the number of shares he buys and sells to be the same. You would also expect supply and demand to drive price movements. This is true to a certain extent, but there are other things happening.

A shop full

Imagine a normal morning and he has a shop full, all wanting for some reason to buy a particular share. He starts selling but his stock under the counter dwindles a little, so he puts up the price. Now fewer people want to buy at the higher price and more people want to sell to him. He will try to keep a fairly minimal stock under the counter but when volumes are high and trade is good he will increase his stock and reduce it when volumes are lean.

Brexit

So what happened last Friday morning? People rushed into the shop all screaming sell and more people were outside screaming Brexit and waving their Union flags. The shopkeeper slashes prices and the people sell their shares and run over the road to buy bonds and gold. With the rush over at the end of the day,  the value of the shopkeepers stock has been slashed and it doesn’t even belong to him. It actually belongs to some pension fund. The shopkeeper has a much larger stock and although the share prices have dropped he can now put prices up and make a killing. So after the panic of Brexit, the dead cat bounced and we saw some recovery this week.

Bargains

Yes, the shrewd customers came back looking for bargains and it was the banks and house builders that took the brunt of the Brexit panic. Two directors of Taylor Wimpey which was so cash rich it paid a special dividend this year increased their stake. They didn’t get the best price, it dropped even further but still did well. I decided to wait and I didn’t get the best price either, but did better than those directors. This is the second time I have bought Taylor Wimpey. Last time I bought at about a 100p and sold at 199p after collecting some nice dividends. I got back in yesterday and bought at 127.5. They are up to 132.8 this morning. That is a nice rise in 24 hours. I was tempted by the banks but they could take a while to recover. Big construction like Balfour Beatty is tempting too. The boss of Balfour Beatty topped up his holdings this week, as well.

Limiting damage

Brexit was a cataclysmic disaster for investors but despite some selling and a shift to the safe havens of bonds and gold it was mostly the market makers who made losses. I think we will now see a slow recovery in prices and the market makers will want to get their stocks down while selling at higher prices than they bought at last Friday. It wasn’t all bad news, large pharmaceuticals like GSK advanced when sterling crashed to an 30 year low.

I shall just be patient now and wait for prices to recover. To add to my misery I saw Graphene Nanochem get suspended for late accounts this week. I think most investors have more or less written that company off. I do hope they make a comeback, graphene is supposed to be the wonder material of the 21st century.

The Brexit chaos did teach me a few lessons and we do have to keep learning. You may remember that the FTSE 100 was over 7000 and dropped to 5600 on a series of bad news. When things are going good, sell and stash the profits away and when disaster strikes, pick up one or two bargains.

I survived Brexit, how about you?

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