Financial Crisis: The housing bubble, Part II

Still talking about bubbles, this time going a bit more into detail regarding the housing bubble.

So, what was this housing bubble?

Due to the economic background, house prices were rising steadily. Houses turned into great investments + you could live in them, you know.

Of course, financial institutes noticed this trend, and started to exploit this investment opportunity. People wanted to buy homes. How will they buy homes?

Loans.

Uh-oh.

 

Banks started to issue more and more loans for houses, because houses are great investments, right? What could possibly go wrong?

More and more people who didn't really qualify for a loan got a loan anyway. This contributed to the financial crisis a lot as well, I'll be talking about this in a later post.

However, after a while, house prices started to decline.. Homes weren't a great investment anymore, and you had a bunch of people, who couldn't possibly pay back their loans, with homes that are losing their value.

Pop goes the bubble. A lot of people couldn't affor their loans anymore, they lost their homes - meanwhile banks didn't get their loans back. Financial crisis in the making.

Financial Crisis: The housing bubble, Part I

Whenever you hear about the financial crisis, you always get "housing bubble" thrown into your face.

This housing bubble was one of the main reasons the financial crisis happened, thus it is really important to cover it in our educational series of the financial crisis.

What exactly is a bubble?
Imagine a bubble. It rises and rises, floating higher and higher. Then, suddenly, without any warning, it pops. Boom goes the bubble.

Now, imagine this same scenario with something regarding finances. It's basically when a "thing" shows something promising (for example the real estate market), keeps growing and growing, and then, without any warning, it pops, and causes everything to crash with it.

Other than the housing bubble, there was a dotcom bubble that you may've heard of. This started when the internet became more and more widespread, and people kept investing in ".com" companies that really had nothing to back the great financial support they were getting. This, of course, was discovered later on, and caused all those companies to crash. Pop goes the bubble.

In part II I'll talk a bit more about the housing bubble itself.

The economic crisis

In the next few weeks, I'll try to give you a basic overview about the economic crisis from a few years prior. It has many stages, and many events that need to be understood to have a full understand about what exactly happened when the "shit hit the fan".

Staying true to the blog's title, I'll make it "noob" friendly, and try to explain it as simply as possible. Topics will include stuff like bubbles, credit ratings, etcetera.

I hope it'll turn out to be really educational!

Quotes from a legend

Just now I was browsing around on the internet, trying to figure out what my next submission should be on the blog. I wanted something informative and something that helps beginners, I thought that some quotes from legendary investor Warren Buffett would actually be more useful than some nooby explanation of some indicators. (of course, those nooby explanations will arrive - sooner or later)

You can check the quotes here.

Trading platforms

The question arises: "How do you trade anyway?"

With the help of trading platforms. A lot of brokerages offer these platforms for free download with a demo, so that you can try them and see if you like it or not. There are a lot of different kind of platforms, they all differ in appearance, and in functions.

Of course, most of the trading platforms do have the same basic stuff a trader might require, however, there are some platforms that offer an immense database of different indicators and other options.

We are noobs, however, and we are quite intimidated by the endless options.

I'll share some reviews about trading platforms that ( in my opinion ) are easy to use, and quite straightforward.

Investor Entertainment: Wall Street (Movie)

I've decided to add some entertainment to the endless flood of information, and recommend a great movie: Wall Street.

The story is about a young Charlie Sheen who wants to live the life of the rich and the powerful, and is ready to do anything to get there. He meets Gordon Gekko, played by Michael Douglas, a powerful business mogul, who decides to take the boy under his wings, and teach him the tricks of the trade.

It was made in 1987, but it's still very entertaining, and a must-see if you're thinking about investing and trying forex. Not because it's full of facts, but because you'll feel awesome when you sit down to trade.

Well, enjoy!

Forex introduction: Leverage

You must be saying "WAIT A SECOND! The exchange rates don't jump around that much!" when you read my last post. That is true. So, how do you make money out of this, when they only move around a tiny bit?

Leverage. This is the two bladed sword that make big profits and even bigger losses reality.

The idea is that the more units you have of that currency, the more the changes in the exchange rates infuence your profits and your losses.

Whenever you trade in forex, you usually buy 10,000 units of that particular currency. 1 lot equals 10,000 units, so when you buy for example 5 lots, you are talking about 50,000 units.

So, buying/selling 1 lot means you basically trade with 10,000$. That's a lot, how can you afford that? Here comes the leverage:

Your broker basically lends you this money. You pay 100$ to your broker, with a leverage of 1:100. That means, you have 10,000$ available to trade with, even though you only 'risk' 100$.

The reason the broker can do this is because currencies are pretty stable, and the money you buy and sell never gets 'worthless'. It's still money.

Basically, whenever you sign up for an account at a broker, always check what leverage options they have and how you can use this to your advantage.