You've heard the stories about the 1929 stock market crash, how investors should have figured out that, when taxi drivers and shoe-shine boys hawked stock tips, the end was near.
The lesson we're supposed to have learned was that cheap margin – the debt that investors can use to finance stock purchases, when wielded by uneducated, blindly optimistic "plungers," can drive stocks up and up over a cliff into an abyss.
Too bad the Chinese never got that memo.
China is now facing a 1929-style stock market crash thanks to rampant margin buying by millions of new investors who believe the market is the road to riches.
But it's not just Chinese plungers or the Chinese economy that's going to suffer.
A 1929-style crash in China will send shock waves around the globe and to your door.
Here's what's really happening and what you can do to protect yourself and even profit from the fallout…
Up, Up, and Away
There are three principal Chinese stock markets: the Shanghai Stock Exchange, where most big company "blue-chip" stocks are traded; the Shenzhen Stock Exchange, where some big and mostly middle-market company stocks are traded; and "China's Nasdaq," known as ChiNext, where mostly small, speculative companies trade.
Stocks on those exchanges, after running up wildly over the past 12 months, are now all selling off.
The Shanghai Composite was up over 100% in the past 52 weeks. It's still up 83% according to optimists, who prefer not to admit it plunged 26% in the last three weeks. The Shenzhen is down almost 30% in the same few weeks after being up 150% in the past 52 weeks and up 60% just since January 1 of this year. The ChiNext is now down 40% from its June highs.
New "investors" are mostly to blame for the run-up and the sell-off as they get hit with margin calls as prices topped out and began falling.
The Perils of New Money
Millions of Chinese have been opening up brokerage accounts and taking the market plunge.
According to the China Securities Depository and Clearing Co., in the last week of April, nearly 1.7 million new brokerage accounts were opened across China. Over a two-week period earlier in April, 2.4 million new accounts were opened. On average, since the beginning of 2015, almost 170,000 brokerage accounts a week have been opened.
Most of the new accounts have been opened up by many of China's least-educated investors.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.