Financial End Game (Part I)

Financial End Game

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The current global financial crisis has its roots embedded in the collapse of the subprime markets in the United States. As at October 2007 there was an estimated loss on the subprime market of approximately $250 billion. If you want to come out on top, you have come to the right place

Whilst at that time the subprime collapse seemed catastrophic, the reduction in the subprime market was in essence relatively limited and was a localized event. The effects of the event though did not in fact remain limited and localized

There has since been an expected cumulative loss of $4,700 billion in world output associated with the financial crisis. The loss in world output represents a figure that is close to twenty times greater than the loss experienced in the collapsed subprime market.

Though this loss is considerable, the impact on the decrease in stock market capitalization from July 2007 until November 2008 alone was calculated to have been $26,400 billion which was one hundred times greater than the loss on the subprime market in the United States where the financial crisis actually began.

Two questions have to be asked. How was it possible for the subprime financial crisis in the United States to occur and how was it possible for such a relatively limited and localized crisis to have been able to cause a crisis of such magnitude to world earnings?

The basics would indicate that there were fundamental flaws existing in the scrutinizing of the subprime market. Very importantly, the risk of the assets was understated and the balance sheets of the derived securities were not transparent to those buying into the risk.

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When the financial crisis began there were two amplifying mechanisms behind the crisis which accelerated the rate of collapse, firstly there began the sale of assets to satisfy liquidity and this was followed by the rapid sale of even more assets to re establish capital ratios

The fact that the financial crisis rapidly spread globally was the result of the interconnectedness between banking institutions both nationally and internationally and the high levels of leveraging of the financial system as a whole

Whilst the term bond is mentioned and talked about considerably in financial circles few people outside of those circles really understand what a bond actually is. If we were to think of a bond as another form of an IOU it becomes easier to comprehend how bonds function

Financial End Game: About Bonds

A bond is a debt security in which the authorized issuer offers the holder a debt and depending on the terms of the bond the issuer is obliged to pay interest to use and or to repay the principal at a later date which is termed maturity.

A bond is in essence a type of loan. It provides the borrower with eternal funds to finance long term investments or in the case of Government bonds, to finance current expenditure. Bonds offer much greater security than shares as there is virtually no risk involved. Bonds and treasury bonds are often utilized by investors when the stock market looks scary and unstable and there is a need for security.

Bonds perform differently to shares and move in the opposite direction of interest rates. When rates rise bonds fall and conversely when rates fall bonds will rise. More complicated than shares, bonds come in an endless variety. For small investors considering debt investing the buying of bond mutual funds is advisable. Bond funds are free of the liquidity of individual bonds and investors can use them to diversify their holdings.

The security of bonds makes them a very attractive addition to any portfolio. The inclusion of bonds can keep a portfolio afloat. They are able to offer a cushion of stability against the unpredictability of stocks. People who are already retired or are entering retirement should ensure the inclusion of bonds in their investment portfolios as they will provide a certain income with minimal risk.

There is much talk of investment in precious metals and investors might question why there is a move to this area of the markets. Precious metals are used to manufacture such every day commodities as coins and jewelry to name just two.

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Financial End Game: Gold And Such

With the increase in world population the demand for these items increases and the consumption of precious metals is so high that the high demand exceeds the supply and the price of the metals goes up. Investors who have investments in precious metals can see their investments go up too.

Although an investor could purchase precious metals in the form of jewelry and coins, the metal contained in those items is not always pure and sentiment may make it hard to dispose of a jewelry item. Bullion purchase could be seen as a sound and conservative investment to make but there is the problem of storing it safely and it can be costly to do so.

Investing in a properly researched precious metals mutual fund can be the least risky way to invest and can yield good rates. Such funds can manage a variety of precious metals. They can also contain stock in mining and so offer diversification. In unstable markets diversification is the key to stability and mutual funds can do that.

Precious metal prices are very volatile so most experts recommend investing only between two and ten percent. Of all the precious metal mutual funds gold funds are by far the most popular as gold has risen more than 200% since 2001. Gold’s high performance as other stocks and bonds fall should make it appealing to all investors concerned about their investment portfolios.

There are risks and rewards with all investments but the current market and economy could make the investment in gold or silver mutual funds a very satisfactory addition to any investment portfolio.

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I wish you great wealth and much happiness. See you next time, read financial end game and get rich my friends!