Debt and finance are issues that impact on each other: financial misdirection or poor speculation both create debt; while the existence of debt may itself cause future problems in the area of general finance. Indeed, the phenomenon of bad or toxic debt had a role to play in the financial crash of 2008, which has caused a recession we are still living through: and speculation on all markets may continue to present a threat to people who do not speculate, in any area where there are no proper measures enforced to separate speculative behaviour from personal finance.
It is perhaps best to begin this discussion by talking about speculation in a little detail. Speculation is the act of betting on the future value of a commodity or a share. The two have technically different definitions – a share is part of a corporate entity, while a commodity is an actual physical class of thing, such as corn or beef. However, the conceptual difference between speculation in shares and speculation in commodities is very small – if, indeed, it can be said that there is any difference at all.
In either case, the speculator assumes – one hopes with valid cause – that the future value of a share or a commodity will be greater than its current value; or conversely, that the future value of said items or concepts will be less. The point, in either case, is to make a bet that turns out to be right: this enables the speculator to get more money out of the equation than he or she put into it.
To do this properly, the speculator must have access to market intelligence. He or she must also be able to interpret this market intelligence in the correct fashion. A commodity market report, for instance, means absolutely nothing to the lay investor and must be interpreted according to expert opinion.
Even in cases where this happens, the investor must always be aware that he or she is still entering into a bet. No financial advisor or investment professional has the ability to see the future. Indeed, it may be said with confidence that the only instances in which an investment fund adviser or other financial agent has absolute knowledge of the future, when it comes to the bets made on the markets, is an illegal one. The only way you can know before you make your bet what the companies and commodities you are betting on are going to do is when you have inside knowledge. This is called insider trading and is absolutely illegal.
The relationship between investment finance and debt is complex. In essence, bad investment practice creates debt by encouraging people who don’t know what they are doing to put money they can’t afford to lose in places where they then lose it. The knock on effects of this behaviour can be severe. A person who is unwisely advised to invest money he or she cannot afford to lose, who then loses it, is suddenly in a position where he or she may no longer be able to pay the mortgage on his or her home. The mortgage forecloses, the money is lost – and when enough mortgages go down, the economy goes with them.
This is what happened in 2008 – and as noted, we’re still hurting from that now.
Shannen is a financial analyst. She uses http://www.crugroup.com to research her articles and books.