Due to the highly complex nature of markets, many investors desire for them to be made as safe as possible. However, despite countless attempts to make markets as safe from risk and volatility as possible, markets will always come with some level of risk. This article will look at the various reasons why markets can never truly be made safe, and will examine why factors like fees, market volatility and unpredictable news events make it difficult to contain full market risk.
The Defining Characteristics of Markets
Before exploring the reasons why markets can never be made fully safe, it is important to understand what makes markets unique. Generally, markets are often volatile, unpredictable and prone to manias and crashes. They also tend to be dynamic and global, operating 24 hours a day. As such, markets have an intrinsic level of risk and uncertainty that is almost impossible to eliminate completely.
Fees
One of the main contributors to market risk is the existence of fees. Fees are the charges required by financial institutions and marketplaces to conduct trades, increase liquidity and cover the cost of operations. Fees are usually charged in the form of commissions, maintenance charges, dividend charges and account fees. It is important to consider these fees when trying to make markets safe, as they are a major factor in trading risk.
Market Volatility
Another major contributing factor to market risk is market volatility. Markets are naturally volatile and can fluctuate dramatically in reaction to news events, economic fundamentals and geopolitical tensions. Markets can also experience sudden swings due to unexpected changes in supply and demand. As markets are inherently unpredictable, it is impossible to make them completely safe from market crashes and downturns caused by sudden shifts in market sentiment.
Unexpected News Events
Unexpected news events such as terrorist attacks, natural disasters, political unrest and unexpected company results can also cause markets to become volatile. These events can cause drastic changes in market sentiment, making it impossible to predict how markets will react. This makes it difficult for markets to be made safe, as markets can become unstable in reaction to unforeseen news events.
Manipulation
Another factor that contributes to market risk is manipulation. Market manipulation has long been a problem in markets and has been linked to insider trading, wash trading and other fraudulent practices. These practices can have a significant impact on market prices, making it difficult to ensure full market safety.
Likelihood of Fraud
Finally, while it is always good to ensure that markets are as safe as possible, it is also important to consider the likelihood of fraud and manipulation. Despite efforts to reduce or eliminate fraud, the prevalence of market manipulation can never be completely ruled out. As such, it is important to pay attention to any market activity that may indicate the presence of fraud.
Despite the numerous attempts to make markets as safe as possible, markets can never be truly safe. This is largely due to factors such as fees, market volatility, unexpected news events, manipulation and the risk of fraud. While markets can become safer over time, it is impossible to eliminate market risk entirely. As such, investors should always be aware of the inherent risk and volatility associated with markets and be prepared to bear the consequences of their investments.
