Understanding Financial Markets In The Digital Age.
Precisely how difficult understanding financial markets is has been illustrated by recent events. Investment banks have brought the American and European financial systems close to collapse. This has had repercussions throughout the world.
It recently became clear that those whose task it was to regulate markets had little idea of what they were doing. Trusted institutions were suddenly belly up and bank executives who were drawing remuneration packages that are almost beyond belief dithered about with pale faces, utterly useless. Fear ruled, and fear is little better than greed in such situations.
Genuine entrepreneurs like Ford, Gates and the founders of Google create wealth by taking risks on good ideas, and backing up their actions with hard work and discipline. The money that they make is deposited in banks where it should first be safe, and then useful. It is useful if it is used to fund other economic opportunities that are safely secured. Banks do not own money. Like governments, they spend other peoples’ money, and therefore must be prudent.
People who work in safe jobs, as in banks and government departments, should not expect huge rewards because they are not exposed to risk. Their jobs are safe, and they may retire on modest pensions. Every month they draw a salary, and that should be their reward for keeping their clients’ money safe. Bank executives who have worked their way up without taking any chances should work by exactly the same rules.
The landscape has been redrawn by electronic trading. The technology has opened up for everyone opportunities which were previously open only to a few specialists. Now individuals can trade in commodities and Foreign Exchange from a yacht in the Bahamas, or from a secret lap top hidden somewhere in the office. Because risks have become so great, a new term has been invented to mean efforts to limit loss and secure an overall success in trading, even in spite of many losses. This is called ‘risk management’.
New instruments like derivatives make possible huge profits or losses. Leveraging is a term which really means borrowing money from banks in order to secure quick profits on a large scale. Very unfortunately losses can be just as quick, and just as large.
What has to be appreciated by individuals is that in entering such markets they are in direct competition with large organizations. In some cases they actually make the markets by creating instruments which the buy and sell in competition with their clients. It is heady and exciting for the individual, but sad statistics show that he loses more than he makes, as a general rule.
Knowledge and reliable information are everything. The individual trader needs to keep himself up-to-date with current concepts. An understanding of financial markets is absolutely essential for survival. He needs to study eight hours a day in order to compete with big banks that have vast capital resources. Publications that outline new concepts and track developments are his lifeline.
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