meaning and benefits of 'diversification in financial markets - Essay Example

Only on StudentShare

Extract of sample
meaning and benefits of 'diversification in financial markets

Some markets can be stable with a clear direction while others move up and down without any clear direction. Such markets are said to be volatile and investing in them can be extremely risky. A lot of volatility increases the chances of losing especially if the capital is not large enough to caution the investment from the volatility (Smith and Schinasi, 1999). Allocating Capital The amount of money to invest in each of the markets or instruments solely depends on the investor. There is a percentage of risk the investor is comfortable investing in each of the chosen portfolios. This should also work together with the behavior of the markets in the last few months or years. An investor can invest more percentage of the capital in stable markets and instruments as there is little or no risk. Volatile and unstable markets should only be allocated a small percentage of the capital. In fact, investors should avoid trading volatile markets. If all the markets of interest are very volatile, the investor should consider waiting for volatility to come down before investing. Diversification in the financial markets has many advantages, including; Guaranteed profits: diversification in financial markets almost guarantees profitability. This is because even in the worst-case scenario, some of the markets and instruments will generate profits. ...
Download paper

Summary

Diversification in financial markets Diversification in financial markets Diversification in financial markets should be approached with a lot of caution. The investor should do an analysis of the different portfolio options and their profitability in the preceding years…
Author : qabshire

Related Essays

Financial Markets and Risk
Capital liquidity is the cash being maintained by the other financial institutions and the banks and the balances with the central bank. Generally, the banks with a lot of liquid assets are in a lot safer position regarding a meeting of any unexpected withdrawals. There are liquidity management measures, which manage liquidity positions that ensure the funding requirements. It also helps in meeting payment obligations under normal or stressful situations. In simpler words, liquidity for the bank means the ability to meet its financial obligations as they arrive in the due course of time. They...
10 pages (2510 words) Research Paper
Markets
The latter performs the process of lending after purchasing securities from the market instead of directly giving out loans. These include insurance companies, investment trusts, pension funds, mutual funds and so on. The major outcome of financial intermediaries is to ensure that at all times there is a steady flow of funds, including cash, which moves smoothly from the surplus units to the deficit units. This in turn will result in regular investments to boast the economy and help support the growth of activities in the market in general. By doing so the ideal funds will be utilized in the...
6 pages (1506 words) Coursework
Derivative Markets
This essay states that in recent times, the world has converted into an uncertain place for financial organisations. Fluctuations in interest rates have extended, and stock markets are running through growing unpredictability. As a consequence of these variations, the financial organisations have happened to be more anxious about minimising the risks. As the demand for risk reduction techniques has enlarged, it has generated innovative financial tools named financial derivatives. These tools are very convenient in minimising the risks and help financial organisations to hedge. Hedging is a...
7 pages (1757 words) Essay
Diversification of Firms
The needs of the customers constantly changes and the firms are often challenged to keep pace with the changes. In order to reduce these risks, a firm needs to diversify its portfolio of stocks (Solnik, 1995, p.89). In the current market, firms should not only focus on how to produce their goods and services and avail them to the clients in the market. Rather, the market dynamics require the firms to develop corporate strategies and respond to these market forces will providing balance to the objectives and goals of the firm (Thinking Made Easier, 2011). In response to the changing market...
8 pages (2008 words) Essay
Marketing: signs and their meaning
A keen look at the activities mentioned therein will reveal a chronological process and not the mere selling of goods it was deemed to be in the past. Marketers first of all research on what it is that the customers want. This can be through conducting surveys via issuing questionnaires to potential customers. After that, they plan on how their products will be tailor-made to fit the customer’s wants. This is followed by pricing the goods. When pricing, a number of factors ought to be taken into consideration such as; cost of production, competitor’s pricing, target market among other...
7 pages (1757 words) Assignment
Money, Banking, and Financial Markets
Since demand for money varies with interest rates, velocity also changes with changes in interest rates. Demand for money also depends upon the expectations about future interest rates. In an article published in The Globe and Mail on July 31, 2013, the author, Linda Stern, suggested to ignore advice such as “Don’t take a mortgage with you in retirement”, and “Older Folks should invest more conservatively” (Stern). In support to the view “Don’t take a mortgage with you in retirement”, it is stated in the article that carrying forward mortgages over a long period of time not...
10 pages (2510 words) Assignment
Emerging markets
Countries globally are developing by encouraging foreign direct investments (FDI). They are doing this in order to increase their economic strength and move forward economically. Emerging markets have developed in various countries especially developing countries. Emerging markets attract FDI based on the mode of the economy in terms of development, political and market share. This paper explains foreign direct investment (FDI) in emerging markets and focuses in China as one of the emerging markets encouraging FDI. Justification of the Topic Foreign direct investment (FDI) in emerging markets...
11 pages (2761 words) Essay
Got a tricky question? Receive an answer from students like you! Try us!