Have you ever wondered how a financial crisis in the US can turn into a global financial crisis just the very next day? Or how some bad news in a major stock market can spark a chain reaction in stock markets across the world within 24 hours?
All that is possible because we live in a globalised world today, where everyone is dependent on one another. Together with the advent of the internet, advanced communication tools and an increasingly interconnected world, news spreads across the world in an instant.
Naturally, an incident affecting any one of the world’s major economies would create a ripple effect in other stock markets who happen to be their trading partners.
The Trillion Dollar Club
The 16 major stock exchanges that make up the “Trillion Dollar Club” account for 87% of global market capitalisation. They include major stock exchanges in the US such as NASDAQ and NYSE, LSE and Euronext in Europe and Japan Exchange Group and HKSE in Asia.
The 3 Main Regions
They are also located in the 3 main regions in the world where over 93% of global stock value is concentrated. They are the United States, Europe and Asia.
Time Zones And The 24 Hour Market
The “24 Hour Market” is real. It is made up of the largest stock markets in the world which so happen to be located in time zones across the world such that each market opens and closes one after the other, creating a 24 hour cycle and a 24 hour market.
When major US markets such as NYSE and NASDAQ come to a close, major Asian markets such as HKEX (Hong Kong), SSE (Shanghai) and JPX (Tokyo) are just preparing to come online. When the Asian markets close, they are followed tightly by the opening of European markets such as the LSE (London) and Euronext.
When the European markets close, it is then time for the US markets to come online again. You can get a clearer picture of the 24 hour market in this visualised clock here.
The Domino Effect
With this global system of stock markets in place and the unique time zones that they are situated in, any major incident that happens in any one of the major stock markets would give rise to a domino effect. This effect would spread globally within the 24-hour cycle as news of the incident travels across the world.
For example, when Lehman Brothers filed for bankruptcy and sent the entire US market crashing in 2008; traders in Japan and other parts of Asia were already starting to panic and placing massive sell orders even before their stock exchanges opened for business.
Naturally, when the Asian markets opened, the stock market came crashing down as well due to the massive amount of selling pressure in lieu of uncertain economic conditions.
While the Asian markets came crashing down, traders and investors in Europe were bracing themselves for what would follow when their own stock markets came online.
This phenomenon occurs because investors and major corporations in the world hold interests in each other across different economies and stock markets. Hence, any crisis in any of the major markets would likely affect business and investors’ confidence to some extent, regardless of country.
Furthermore, money does not simply just disappear. It has to move somewhere. When an event happens in a major market, investors could pull out their money and move it to safer markets or safer instruments, crashing the stock market in the process.
However, the money is actually being moved elsewhere. It did not simply disappear from the stock market, although it might appear so. The money has just been temporarily moved away from the stock market that’s in trouble. When the market recovers, the money that has been moved away would slowly flow back into the stock markets, driving the value of stocks up again in the process.
Why Some Traders Keep An Eye On 2 Markets At A Time
Because of the 24-hour global market and how it works, some traders specialise in trading across 2 consecutive markets in one shift. That is so they can pick up on the movements of the previous market and make trades that would benefit from them in the next market that opens.
Understanding how the 24-hour global market works might give you an upper hand as a stock trader. Besides that, you might be able to brace yourself on when your local market would crash by keeping an eye on the major market that opens and closes right before yours does.
Read Also: How And When Should I Start Investing?
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