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What causes financial markets to go up

By Edited Aug 15, 2016 0 0

If you asked an average person to explain causes for booms and collapses in the markets you would probably get a very vague answer. Most people just do not know what affects markets and why we have regular bubbles and crises. The vast majority of us think that markets are like seasons that change each other; winter, spring, summer and autumn and then the same procedure again. However, natural phenomena cannot be applied to markets, because they are directly influenced by the amount of buy and sell positions and not by change in the atmosphere or wind direction. It is people decisions to get in and out of markets that affect the markets most.

Those decisions are mostly influenced by the current level of interest rates that central banks set. Low interest rates usually increase borrowing. They prepare a background for financial bubbles to be formed. When they are low it is very good to borrow money for businesses, houses, cars and etc. Increase of borrowing fills markets with cheap money and in this way stocks, currencies, metals and other commodities start increasing in value. Businesses start expanding, various markets sectors booming and finally inflation rising.

This usually hurts markets as borrowing starts slowing down and not so much money reaches the markets. When interest rates are raised very high, markets usually collapse sooner rather than later. Why? Some companies, private individuals become unable to pay off interest, to say nothing of principals and start going bankrupt. Other companies start selling their shares to have some cash as the banks are not so generous to provide it to the companies for working capital. Stocks start collapsing and other securities with them. In this way a bubble bursts and a financial crisis follows.

Most people think that both booms and crises have only disadvantages, but this is due to the lack of understanding of how markets function. One may take advantage of both scenarios and make money in boom and in crisis. In the beginning of any boom one can start purchasing various stocks and commodities and keep them as long as markets peak. That's when they should sell as at this time crisis usually begins. One should not only sell his previous long position, but also start building a line of short positions, because after a boom there is always a big collapse. In this way one can profit both from a boom and a collapse.

Booms come and go and so do crises. They are repetitive as human foolishness is. However, we can learn from history and no longer repeat mistakes that people made in the past. If we learn how to behave during boom times we will not feel any crisis when it comes, because we would have enough capital to survive it. So, let us take time to study markets and conditions that make them rise and fall and when we see the conditions forming for a future move in the market, let us not hesitate but take advantage of what we noticed and make some cash in the markets. Good luck in your studies.



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