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Financial markets play an important role in the stability and the external growth of local, national, and global economy (Campbell, Lo, & MacKinlay, 2012). Therefore, in case of emergencies or unpredicted changes, it is important to analyze the situation and clarify the reasons for the concerns. Recently, financial markets have undergone considerable changes and achieved numerous benefits. At the same time, a number of risks and challenges appear. In the paper, the explanation on how risk may play a role in financial markets and the evaluation of the Bernard Madoff’s scandal and its effects on the way people view the stock market and their investing plans will be developed.
Risk in financial markets
According to Brigham and Ehrhardt (2014), risk is the chance that something unfavorable may occur. Every situation may have its own risks, and the risk in financial markets is the situation when something unfavorable and usually unpredictable occurs with financing, financial transactions, debts, limited loans, etc. Financial market risks are usually characterized by volatility, default, or unstable interest rate or counterparty conditions.
In financial markets, risk plays an important role because people want to be confident that their money and life savings can be in safe. However, the existing uncertainty in values and a variety of changes in stock prices, interest rates, foreign exchange rates, and even commodity prices that cannot be predicted or overcome create certain statistical measures people have to deal with. All stakeholders want to know how to manage risks, follow the standards established, and gain benefits.
Bernard Madoff and the stock market
A certain attention to the idea of financial market risk has been paid after the scandal based on the activities of Bernard Madoff, an American money manager, who created one of the most powerful and fraudulent pyramids and introduced it as a reliable investment company in the 1960s. Though Madoff admitted that one of the possible reasons for why the fraud took place was the development of the economic crisis in 2008 (Rhee, 2009), the situation touched upon a number of other factors that created the web which was impossible to leave without certain losses.
Madoff offered people investments on good terms, and the investors did not even think that their annual 10-15% incomes were fabricated at the expense of other people’s investments. Madoff’s inability and unwillingness to stop investing and confess to the people he worked with were the main reasons for the scandal that took place in the middle of the 2000s. The results of his fraud changed the views of people on the stock market and their investing plans considerably.
A number of people lost everything with the crash of Madoff’s company. The idea of investing was put under a serious question because not many people wanted to invest anymore. People were deprived of guarantees and safety of their money. This situation was one of the brightest examples of how financial market risk led to the collapse of the company, the ends of several lives, and the inabilities to make the investing activity gain the same level of popularity. Many financial markets underwent considerable losses with the risk associated with the Madoff’s story.
In general, a financial market risk is a broad topic that is characterized by a number of types and outcomes. People have to investigate this area better in order to provide all stakeholders with a hope that it is safe to invest money and provide a professional organization with a chance to take care of someone’s money. The example of Bernard Madoff should not be the only example to pay attention to. There are many credible and successful investors, who may help and offer captivating and profitable conditions.
Brigham, E.F. & Ehrhardt, M.C. (2014). Financial management: Theory and practice. Mason, OH: Cengage Learning.
Campbell, J.Y., Lo, A.W., & MacKinlay, C. (2012). The econometrics of financial markets. Princeton, NJ: Princeton University Press.
Rhee, R.J. (2009). The Madoff scandal, market regulatory failure and the business education of lawyers. The Journal of Corporation Law, 35(2): 101-129.