Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
is in a safe place. This is especially true with the big institutions where they handle huge amounts of money and they have a lot to lose when risks are high. And the stock market is at times a risky place to bet the whole house. So where can they go to mitigate risk at least with part of their holdings? Enter bonds.
Bonds (especially the safe ones such as the long bond) have always offered a safe haven for when stocks get too dicey. Sure their returns may be far less than stocks during good times (bull market), but they are for the most part a better bet. You would want to have your money invested in bonds too when stocks fall on hard times (bear market). That is why on many days you may see a noticeable divergence between stock and bond prices. One will be going up while the other is declining and vice versa. This is mostly demonstrated by inspecting the benchmark values of each market, notably the DJIA or S&P 500 on the stock side versus the long bond on the bond side. The media disseminates this information around the clock, reflecting the pulse of the market, so to speak. You can probably see why these markets would sometimes be headed in opposite directions. A declining stock market signals that money is being sucked out of stocks, and usually this money is being pumped into bonds, which is a logical choice rather than having cash just sitting around or getting into other types of investments. Sure there are other kinds of investments around, but none are as liquid as stocks and bonds. (Again, liquid refers to the fact that there is so much volume that one can easily buy or sell these instruments.) No wonder when people talk about investing, the expression "stocks and bonds" is often used, joining these markets together.
So there is yet another possible future indicator for the stock market. For example, if you hear that the long bond is way up in the morning, it may just point to the fact the stocks will be declining for that day. …
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