The recent turmoil in the worlds equities markets has made it harder and harder to successfully make money from trading equity stocks. The after effects of the credit crisis are having a much longer and more sustained affect on global stock markets than first feared.
Why equities are a bad choice
Virtually all listed companies fund their activities through a combination of both equity (issuing shares to investors) and debt. The debt component of a companies funding can be both short term (such as an overdraft facility) or longer term in the form of a term loan or through the issue of bonds.
The recent credit crisis has occurred because banks have become much less willing to lend money to each other and other large corporate for fear that the counter party will have losses related to the housing crisis in the form of mortgage backed securities. In short they are scared and wary of counter parties losing money through sub prime investments and defaulting on their repayments.
The above factor has had the effect of making borrowing more expensive. If companies have to pay more to borrow their profits will be reduced. As a result of this stock markets have been performing badly.
A lot of investors have been moving their money instead into commodity related investments such as oil, gas and energy. This makes sense for a couple of reasons. Firstly such commodities tend to have a scarcity factor. In other words the supply of oil is limited by the amount that there is in the ground.
In addition to limited supply the demand for these commodity products has been increasing dramatically as emerging nations and economies such as India and China grow rapidly and consume them at a much higher rate. The net effect of these factors has been rising commodity prices.
With neither demand looking likely to fall or supply increasing, investing in commodities is looking like a smart bet, especially at a time of such high volatility in the equities markets.
To learn all you need to know about trading commodities or investing in oil please visit one of the links above.
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