With the Shanghai Composite Index dropping about 6.5%, it marks the first major correction that many Chinese investors have experienced. These investors have seen the index rise 122% this year, taking into account today's loses. They have never known loses.
A topic not often written about is investor psychology. With this market being primarily composed of retail investors, will it behave differently from more mature markets primarily composed of institutional investors? My sense is that this will add to volatility.
Many Chinese investors have surely never experienced a correction of this magnitude, and one must wonder whether today will leave a bad taste in their mouths. What will happen to the market if enough retail investors throw in the towel on stocks? A large enough correction could trigger a domino effect of exit from the market by retail investors.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.