Trap for Investors (5) - Derivatives Market

A friend had forwarded me a very interesting story that illustrates how the derivative markets created the bubbles. (I was told the author is an accountant, but don't know the author's name.)


Explanation of Derivative Markets



By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.





Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.



Now do you understand?


And, one more IMPORTANT QUESTION is that:-
Is this was an Accident by mistake or an Intention by design?

There are other effects that the derivative markets have actually affected the traditional stock market operation. Such as:

1) Insiders Buying/Selling information used to be an excellent guide for predicting the short to mid-term price movement. By law, insiders must report their activities for buying or selling stocks. But, with derivatives, insiders can now using put or call options to make profits which need not to be reported. And not to forget that many derivatives such as options are higly leveraged. Therefore, Insiders Buying/Selling information is not so much useful as compare to the past.

2) As people are now able to use puts and calls to profit from the market, the classical Tape Reading Technique is no more as accurate as the past.

In real life, many of those who lack of money are not because that they don't know how to make money. They are lacking of money mainly because they don't spend their money wisely and more critically is that they do wrong investment with their money.

"The state of being rich is not how much money you had already
earned in the past, but how fast you can have it grown
against the inflation in the future."
-KH Tang


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