Financial crisis is a term used to refer to an economic condition where there is widespread fall in the value of assets. It can be a result of various factors and in extreme cases, can lead to collapse of the economy. Financial crisis may result in a huge drop in stock prices and in such a scenario, most of the investors who had invested in the stock market, end up losing their money. Does that mean that you should refrain from investing during a period of financial crisis? Well, not exactly; because financial crisis is not something that cannot be overcome. People who invest during this phase, begin to earn profits as the economy recovers. However, investment options during financial crisis are limited and you should know exactly where and when to invest, to reap profits. Curious to know more? This article tells you all about it.
Types of Financial Crisis
The two types of financial crisis are banking crisis and stock market crashes. A banking crisis can be a result of bank runs or a credit crunch, both of which are situations where the bank is not in a capacity to issue loans to its customers, due to little or no money. A bank run is a situation whereby people who have their money deposited in a bank, rush to withdraw them. In such a scenario, it might get difficult for the banks to payback so many people at the same time and this often causes the banks to go bankrupt, and many people end up losing their money. A credit crunch, however, is a situation whereby the bank is reluctant to lend money due to insufficient funds. If you observe the trends of the stock market closely, you'll find that sometimes, the price of the stocks of a particular company rises beyond expectations simply because a majority of the investors begin to speculate huge growth of the company in the near future. Hence, these people expect the stocks of the particular company, to rise further in value. This is termed as a stock market bubble. However, sometimes, a sudden drop in the value of these stocks can cause a stock market crash with investors standing to lose huge amounts.
Investment During Financial Crisis
At the face of financial crisis, you should consider putting your money in investments that are likely to fetch you long-term returns. Here are some pointers that will help you take wise investment decisions even in the face of a financial crisis.
Invest in Gold and Silver
During financial crisis, the economy suffers, resulting in a drop in prices of commodities to an all time low and this applies to precious metals such as gold and silver as well. The best thing about investing in precious metals is that in spite of temporary fluctuations, the prices of these metals seldom drop permanently. So, as long as the financial crisis lasts, you can invest your money in purchasing gold. As the economy begins to recover, the prices are sure to rise and you can sell the gold and make huge profits in the process. A major advantage of investing in gold is that the demand for it will never decrease in the global market, so no matter how high the prices go, you would be able to sell your gold easily. Another way of investing in precious metals, is buying precious metals mining shares.
Invest in Crude Oil
Similar to precious metals, investing in crude oil is a safe bet, because even though you'll see the prices of petroleum products fall during financial crisis, it can be taken for granted that the prices will steeply rise once the economy begins to recover. There are several ways in which you can invest in crude oil. You can either invest in stocks of oil companies or purchase options. Options are nothing but securities that give you the right to buy stocks of the company at any time you wish to. Simply by purchasing an option, you can earn a certain amount every time there is a change in the price of the stocks of the company. Options are safer than stocks and have the potential to offer very high returns.
Protect Your Liquid Capital
Liquid capital, in the language of finance, refers to cash. Before you set out to invest in any of the investment options, make sure you have sufficient savings. This is because investing at the time of financial crisis, itself, is risky and so it is recommended that you have cash in your bank account to last for at least a year. This way, even if you chance to suffer losses, you can bear the expenses of your family. Also, make sure you clear all your debts. It is always advisable that you do not invest all your money, even if the investment seems the safest.
Invest in Foreign Exchange (Forex)
Foreign exchange trading is one of the most lucrative trading options today, with the potential to make millions. This is all the more so when the economy is witnessing deflation i.e., reduction in prices of commodities and thus, increase in the real value of currency. This increase in the value of the national currency can help you earn profits in the foreign exchange market. There are many foreign exchange trading software available that help you keep track of exchange rates, real-time.
Invest in Bonds
Another safe option when it comes to investments at the time of financial crisis, when the general interest rates are low, is investing in bonds. The reason is that the interest rates for bonds are reverse of the general interest rates. A bond is a certificate that bears a fixed rate of interest and has a maturity period. When you purchase a bond, you stand to earn a fixed amount every month till the end of the maturity period. You can either invest in treasury bonds issued by the government or corporate bonds issued by business firms. Before deciding to invest your money in corporate bonds, make sure you research well about the firm, and study the balance sheets carefully. Investing in treasury bonds is safer as they are issued by the government, and are considered low-risk investment vehicles, when compared to corporate bonds. However, bonds are safer to invest in, as compared to stocks, because you don't stand to lose anything by investing in a bond.
Now that you are aware of the best investments options to go for at the time of financial crisis, remember to distribute your total investing amount by investing in different areas. This way, even if one of your investments fail to fetch you good returns, you can make up for it with the profits earned from the others.