Markets

Globalization has made markets increasingly interdependent, and the performance of a national financial market can have deep effects on those of other nations halfway around world. Thus, fluctuations in Asian markets can have effects on European and American stock markets. A crisis in a financial market is usually caused by the bursting of a so-called stock market bubble. A bubble is usually created by the growth of public enthusiasm for a particular type of stock. This enthusiasm develops into herd behavior, thus creating excessive expectations from such stocks and a consequent bull market. In this type of market, the prices of the stock rise considerably, making it significantly overvalued in comparison to its effective market value. In the case of the financial crisis that started in 2007, the bubble whose bursting led to the worst economic recession since the Great Depression was linked to the real estate and subprime mortgages market.

Literally speaking and in their oldest meaning, markets are physical locations where goods are bought and sold either directly or through intermediaries. Buyers go to markets to find products that they need while owners use markets to sell goods that can satisfy the needs of their customers. Yet, in our modern and globalized societies, the meaning of “market” has expanded and now encompasses entire systems where traders compete with each other for clients. In addition, markets can now be virtual as well as concrete places, as the development of new technologies has made possible transactions over the Internet and between places at the opposite ends of the globe. However, even in this more modern meaning, the notion of market retains the dimension of the exchange that goes on between buyers and sellers.

Financial markets involve transactions regarding financial securities such as stocks, bonds, futures, options, and commodities such as precious metals or real estate. These transactions facilitate the exchange between those who have money to invest and those who need money for their activities. The term securities refers precisely to the written receipt that the borrower issues to the lender pledging to pay back the loan. In exchange for the funds given, the lender will also receive some form of financial compensation either in the form of dividends or interests. Stockholders, for example, receive the profit margin (dividend) of the company they have shares in and can make additional profits by buying stocks at a low price and selling them when they have increased their value. Financial markets, however, also involve risks because if the firm of the previous example does not make profits, shareholders do not get dividends and the value of their shares may fall below the level of the original purchase. If stakeholders sell their shares when their price is lower than what it was when they bought them, they obviously take a loss rather than make profits.

Events that are not strictly economic can also exert positive or negative influences on financial markets. Political instability and scandals are usually negatively viewed by markets. For example, the Watergate scandals and the aftermath of the Vietnam War were damaging for the American stock market during the 1970s, a decade that witnessed fluctuating cycles of growth and decline. As the United States consolidated its worldwide hegemony in the 1980s and 1990s, American financial markets significantly increased the volume of trading. Yet, prolonged periods of growth can generate speculation and thus sudden drops, as was the case in 1987, when the Dow Jones fell suddenly by 508 points, and again 10 years later, when the index lost 554 points. At the beginning of the 21st century, the terrorist attacks against the World Trade Center on September 11, 2001, brought about a 4-day closure of the New York Stock Exchange. The United States and Western countries suddenly felt vulnerable to the threats of global terrorism. The anxieties caused by the repeated terrorist attacks against Western targets around the world and, especially, by the Madrid (in 2004), London (in 2005), and Moscow (in 2010) bombings, have led to a period of financial instability in markets worldwide. The wars in Iraq and Afghanistan have contributed to create such instability.

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