How To Spot A Financial Bubble - City Index

LONDON, July 12, 2011 /PRNewswire/ --

Business-oriented social network LinkedIn recently joined the New York Stock Exchange. Valued at £9 billion, its shares opened with a roar reminiscent of the infamous dotcom bubble, doubling in value on their first day.

A characteristic of bubbles is that they tend to be identified only after they have burst, so spread betting provider City Index ( http://www.cityindex.co.uk/) looks at the five stages of a bubble, as identified by American economist Hyman Minsky.

Displacement

A displacement occurs when investors get enamored by a new paradigm, such as an innovative new technology or interest rates that are historically low.

Boom

Prices rise slowly at first, but then gain momentum as more and more participants enter the market. During the boom phase, the asset in question attracts widespread media coverage. Fear of missing out on what could be an once-in-a-lifetime opportunity draws an increasing number of participants into the fold. 

Euphoria

As euphoria takes hold, caution is thrown to the wind and asset prices skyrocket. New valuation measures and metrics are touted to justify the relentless rise in asset prices.

Profit Taking

By this time, the smart money - heeding the warning signs - is generally selling out positions and taking profits. But estimating the exact time when a bubble is due to collapse can be a difficult exercise and extremely hazardous to one's financial health.

Panic

In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. Investors and speculators, faced with margin calls and plunging values of their holdings, now want to liquidate them at any price. As supply overwhelms demand, asset prices slide sharply.

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About City Index: Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform. As a group, we transact in excess of 1.5 million trades every month in over 50 countries. We provide access to a wide range of instruments including margined foreign exchange, contracts for difference ( CFDs) and, in the UK, financial spread betting. We constantly look to improve the performance of our platforms and expand the range of services we provide. The result is that our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer support.

Visit http://www.cityindex.co.uk/ for more information.

SOURCE City Index

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