Home Business Insights & Advice Can instability in the financial market be a positive thing

Can instability in the financial market be a positive thing

by John Saunders
26th Feb 21 11:32 am

The financial market is a marketplace where people can buy, sale or just trade with assets, currencies, shares, stocks, and so on. For financial markets, it’s sometimes typical of being unstable. What instability of financial markets can lead us to? Can financial market instability be a positive thing? What are the advantages and disadvantages of being involved in unstable markets?

Let’s discuss the essential things we should know about the above-mentioned questions and conclude whether an unstable financial market can lead us to something profitable, can help us to gain money or not.

What is the instability of the financial market

The financial markets, as we already mentioned, are sometimes unstable. This means that the prices of the stocks, assets, currencies, etc. are fluctuating and becoming unable to predict future tendencies. The prediction and calculating of the future means a lot in financial markets to see profits.

The significant reason for what causes the instability is grounded on the demand and supply law. As demand rises for the product, the price of the certain product increases too, while decreasing the demand for the output causes the lowering of the output’s price. But these processes in the case of supply become the opposite. The law of demand and supply, in unstable financial markets, works at a higher speed than usual.

So, instability of the financial market means that prices on the currencies, assets, stocks, and so on are changing in the short-term and make the market impossible to foresee.

Advantages of the unstable financial market

While most of the financial books have taught us that making money on financial assets is mostly done by buying low and selling high, this does not seem to be the ultimate truth anymore. With the advancement of trading technology as well as the trading regulations, brokers are now provided with both technical and legal possibilities to let their clients employ short-selling techniques. While short selling carries an infinite amount of risks, it is still quite a popular way for traders to profit from the falling market. However, the best (and also the worst) results are usually achieved by the traders that gear their position up by employing financial leverage.

Nowadays, even stockbrokers provide their clients with a possibility to trade on a margin, yet usually, the available leverage tends to be rather low with stockbrokers – anywhere between 2:1 and 5:1. However, currency trading brokers often provide a much larger financial leverage, often going as high as 500:1. This had led FX traders to develop various strategies that are based on the frequent yet insignificant moves of the financial instruments. Often traders refer to this as a Grid, and this is why we advise every newcomer to understand what a Forex grid strategy is and how it works. Whether a trader is thinking of employing an automated strategy himself or he seeks a better understanding of the price walls, the knowledge of the grid strategy in the FX market is of great importance.

From the description of the financial market instability, it may seem that the volatile financial market cannot be a positive thing and cannot have any advantage. However, that’s not true.

Furthermore, unstable financial markets give traders opportunities. If there were no changes in prices, there would be no chance to gain money, especially in a short time.

Disadvantages of the unstable financial market

As financial markets with high volatility have advantages that traders can take off, there are also some drawbacks that are part of the financial market fluctuations.

Firstly, one of the significant risks, which is referred to as that kind of market, is losing money. For example, when we buy something that has a high value, unforeseen processes, which are changeable at a faster speed, can cause its price to decrease instantly. That, eventually, leads us to lose the profit we were planning to gain after buying something highly valued.

What’s more for the unstable financial market it’s typical of excessive speculations. There can be any speculations from the traders or suppliers. They, in some cases,  in order to see for themselves profit, convince people to buy some kind of assets, which usually are unremunerative. So, an unstable market requests from us a good strategy to act or an experience for not to be the victim of scam or fraud.

One more disadvantage of financial market instability lies in the asymmetries and the lack of information. Sometimes there is not enough or sufficient information about assets, so this is something which, in most cases, leads traders to see a loss.

Instant example of financial market instability

One of the viral stories, which shows us how unstable the financial market can be, with its own typical advantages and disadvantages, is about GameStop.

The GameStop story started with the Reddit users on the forum named  r/WallStreetBets. While GameStop’s stock prices were decreasing gradually, users made a decision to buy instantly GameStop stocks, in order to make their prices higher. Companies that invested their money in decreasing GameStop’s stocks, started losing their money. And as many people were buying the stocks, people who bought them before the GameStop frenzy, started to see a lot of gains, as prices on stocks increased.

So this story shows, how the volatility of the financial market can change the price of assets and can lead us to the unforeseen results. Here is a detailed post about GameStop story and similar phenomena.

Can the financial market instability be a positive thing

To conclude, depending on the information given above, we can say that there are some disadvantages which make financial market instability a negative thing, but there are also some reasons why the unstable financial market provides us with something beneficial and how it helps us to gain money in the short time. Long story short, the answer to our main topic is – yes.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.

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