Financial market has very recently gone through major downfall and now it is in a kind of recovering mode. Though there are many factors which contributed to this downfall, one of the major reason was the liberal lending of top finance organizations in forms of loan.
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A huge pool of assets was offered for investors with very low interest rates. There is only a low risk premium involved in the investment. Even banks took the most part of the risk involved in the deal. Though banks held mortgages from every borrower, the price of the mortgages didn’t raise to the expected levels.
So, instead of paying back the loan, many borrowers opted for taking away the mortgages by the bank. For example if a person opted for purchasing a hedge fund. The person can add lots of bonds to have a raise in the equity. The bonds can be leveraged by borrowing against them. After some days the asset which has been purchased by leveraging the bond might have low value that the debt the person owns against them. The equity of the hedge fund can also drop to zero by making a loss to the bank not to the borrower.
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Finally the hedge fund manager is forced to sell them off for a considerably low amount. Mortgages started accumulated in the financial market and since the mortgages didn’t meet the expected level, several financial firms suffered a huge loss. ( Mortgages can be both physical assets and bonds )
Systematic risks will always be there in any economic fundamentals. Financial markets contribute much for this. Though many developed countries are well established and supports lots of development activities stabilizing the financial status have always been a difficult task. This continues till now from the past history. We have seen the financial market crisis and collapse in this decade.
We can say that now the financial market is in a recovery state. From the recent past both the investors and the business firms who invested in the financial markets have learned much. The rules and regulations for loan process have been tightened. Unlike the liberalization of loan products in the past decades, now government has added a check on this.
Because the promotion of loan especially real estate related financing ( or property loans ) for low interest rate was also considered to be one of the major causes for the recession. Capital inflow has started rising. Many companies have also started raising concerns over the asset price and the pressure on the exchange rates.
The recent downfall in the financial market also created opportunity for many middle class investors to buy shares. The moment economy started to grow, the financial market investment also started. This seems to be the best time to buy shares.
Though many experts forecast a boom in the financial market again, the unpredictable nature of this market still raises scares among people. So, present situation should be assessed well and diversified investments should be made for a high return.
