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Mar 24

The impacts of war on financial market

Posted by abiao at 12:57 | Default | Comments(0) | Reads(1573)

War has a big impact on final markets. First and foremost, it is a very expensive affair even though it provides a chance for the involved countries to test their military prowess. Countries that engage in war tend to spend heavily towards the provision of military hardware and logistical needs for the troops. This has a tendency of draining a country’s financial resources. Similarly, it affects the financial markets negatively. As a result, the volume of trading at the financial market will nosedive, leading to lose of revenue. This is because most traders at the bourse are kept away due to the prevailing fear occasioned by the imposition of curfews and fire exchange.

Due to economic challenges, some countries find it difficult to finance a war. As a result, they are forced to issue a bond. For such countries, it is the only viable means through which a government can raise finances to fund an existing war. This may cause a big rise in demand for the bonds because the government will be offering them at affordable rates. Similarly, the bonds are issued out to the interested parties at various denominations so as to increase purchasing power. When this is done, the country at war reduces, by a high margin, the amount of money in circulation. This helps in cushioning its citizens from subsequent inflation that comes along with war.

Wars lead to a decline in the value of stock at the financial market. This is because investors will be uncertain about the safety of their investment. Listed companies that are major providers of essential products like oil and gas suffer greatly. This is because, in most cases, their operational bases are destroyed, and this leads to loss of investor confidence. As a result, potential investors will be unwilling to buy shares of the affected firms.

It is important to understand that wars lead to a rise in global fuel prices. Consequently, there may be an increase in the price of stocks of the firm that supplies fuel. For instance, the Arab-Israeli war of the 70s led to a massive increase of oil prices. This considerably slowed down economic growth. The Russian invasion of Afghanistan in the 80s also saw the price of oil rising steadily, thereby affecting financial markets and foreign exchange.

When economic growth slows down, the number of investors at financial markets is also reduced. This has a negative effect on the war stock currency bond. This is because citizens may not have extra funds to commit towards this objective. The cold war of the 1980s between Russia and the United States brought about many undesirable economic effects. For instance, there was loss of investor confidence in the Russian market.

When there is an outbreak of war, most people, especially investors become a worried lot. This may force them to sell their assets and convert the money into some safe currencies especially the dollar which is accepted universally. This causes the rate of foreign exchange to shoot up, thus destabilizing the economy. This, in turn, affects the financial market in that there will be an increased demand for dollars.

Considering the current unrest in Ukraine, there is an increased demand for a haven for precious commodities such as gold. This has caused an increase in price of this precious metal at the financial market. In some cases, there could be a boycott against products of the invading country. This may lead to a low price for the listed companies at the financial market. The prices of stocks and bonds have fallen greatly in both Russian and Ukrainian markets. This may get worse of the current situation continues.

Wars are known to create fear and panic all over the world. This affects trading at financial markets and leads to low volumes of trade. Firms and individual investors will end up making huge losses on their investments. This is occasioned by the urgent and unplanned need to convert the stock into cash. Consequently, there is a big tendency to sell such stocks at low prices in order to get instant buyers.

Most governments will issue out a war stock currency bond to their citizens to justify their cause for war. This leads to mass participation, thus raising a lot of revenue through the financial market. This causes investors to shun shares from other companies and purchase the one offered by the central government due to the perceived security. The cash raised has a retrogressive effect on the foreign exchange. This is because it will have to be exchanged at a low value in order to import the necessary equipment for the war.


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