A financial “meltdown” occurs when prices of a specific asset class rise suddenly and dramatically due to investors buying assets to avoid missing out on the rising trend. However, when investors realize that the fundamentals cannot support rising prices, a sell-off can begin, leading to a “crash.” Investors must keep a close eye on financial fundamentals to avoid being hurt by a crisis.
In the world of finance, a “meltdown” occurs when there is a sudden and dramatic rise in the prices of a specific asset class, such as stocks or bonds. This rise is driven for the most part by investors buying the assets so they don’t miss out on the rising tide. The problem with a “merger” is that it owes more to momentum than any significant change in the financial perspective. When investors realize that the fundamentals behind the assets cannot support rising prices, a sell-off can begin, leading to the opposite effect, a “crash.”
Investors have different ways of choosing the financial instruments in which they choose to invest. Some choose to look at the fundamental statistics behind the companies or institutions that issue stocks and bonds, choosing only those companies that have strong financials and excellent intangibles behind them. Other investors look for market trends, trying to catch up when a wave of momentum sweeps through all assets on its way to higher prices. These latter investors are likely to be the cause of a financial ‘meltdown’.
When prices rise unexpectedly for certain assets, it could be the sign of a “merger” in progress. What usually happens is that trend-seeking investors will notice rising prices and, because they don’t want to miss out on the gold opportunity, will start buying as a result. Those investors who are short, meaning they are in the process of selling the rising assets, may also wish to hedge their positions by buying instead. As a result, the market increases significantly.
It is important to understand that not all surges in a market are signs of a “meltdown.” This phenomenon is only present when the underlying financial situation does not support rising prices. Indicators such as company earnings, interest rates, unemployment, inflation, and other key macroeconomic components are likely to point in the opposite direction of price movement in a typical price meltdown situation.
The other defining characteristic of a “merger” is that it is destined to disappear. When that happens, panic selling can occur by investors worried about getting caught up on the wrong side of the trend. All of this leads to momentum steadily heading down to the point where prices can even drop below where they were when prices started to rise. For that reason, investors must keep a close eye on financial fundamentals or act with expert timing to avoid being hurt by a crisis.
Smart Asset.
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