Thursday, April 26, 2012

What are the reasons for bubbles in financial markets

Market booms are nothing new. They have always been and they will be till the end of the world. People do not know this because they do not study markets and that’s why they think when market bubbles form it is something new. It is not. It happens repetitively at least every ten years, so you can expect to catch a market boom or some 5-6 booms till you are alive. But what causes market booms? 

One of the key things that cause markets to boom is low interest rates that central banks set up. This provides people with unique opportunities to borrow money under very good conditions. Huge banks borrow money from central banks, they distribute it to smaller ones, and those give it to people and different businesses and in this way a lot of money starts reaching market. It is being poured into different stock markets, commodity markets, and currency markets and into economy as a whole.

This causes salaries to rise, all economy spheres to boom and a nation to prosper. However, after some time inflation starts going up. It brings interest rates up as well. Various financial markets slow down as it becomes not so easy to borrow money and invest in the markets. When interest rates peak, stocks are going down, sometimes collapsing, businesses find it difficult to do new projects, people to pay off their loans and bankruptcies start. In this way economy starts contracting and the end of the boom is usually crisis. 

So, this information can be used to make advantage of various markets booms. You know that when it starts it will continue for some time and you will be able to make some nice cash before the boom is over. I would encourage you to study financial markets and watch for conditions that would show you that a market bubble is on its way. Good luck.
See also: Gold and silver