Questions and Answers
I know it's a bit complicated. Break it down using layman ( non-industry language) It helps to get the basic general concepts first.
Basically, it has all happened due to the Real Estate Boom in the US.
Wherever Real-estate is concerned,there are 3 types of customers buying it
1.The real customer – generally a middle class man buying a house
2.The unreal customer – A broker or dealer or an investor, who wont actually use the Real estate
3.The bank – Both types take loans from the banks
Now there is a limitation for Type1 customer.
Say some property costs $400.
1.The real customer can take a loan from bank and pay that amount.
2.The unreal customer has more money to invest he says he will pay $500 for the property.
3.As people were very sure that real estate prices will definitely rise,Type2's group together and buy the property
at even a higher rate as there is competition between Type2 customers, making the property price rise as high as $900, $1000.
4.Even banks were careless while giving loans to such Type2's, so they gave a lot and lot of loans 2 such people.
This kept happening and properties were bought at enormous prices 4-5 times their original prices. At one point the
number of Type2's became more than Type1's, so now no ones using the property people are just buying it.
SO at one point of time it was panic spread that prices of property will go down,these unreal cust. Started selling the property
but now no one would buy as everyone wants to SELL.
So properties were sold at prices lower than their original prices $200-$300 by the real customers.
Eventually Type2's became bankrupt bearing heavy losses, they defaulted the heavy loans taken from banks, which in turn made US banks bankrupt.
Which in turn affected everyone related to those banks, may it be Satyam Soft solutions or FII's in Asia/India drawing their money back
to save their losses in the US.
So it has become a world economic crisis.
Hope that's enough.
Who do you hate more:
b) Union Carbide
c) Real Estate Agents.
I just want to know where the profits come from. Does it lead to the bleeding of individual investors? Or, does it come from losses sustained by other large market players, like hedge funds.
Obviously, money cannot come out of no where, it has to come from somewhere. But, from where?
Trading, profits, finance, money making, small investor, volatility.
Investment Banks generate profits in many way. Here are a few:
1. Trading. They constantly buy and sell securities, providing liquidity for other market participants. On stocks and bonds there is a bid/ask spread. As an investor, you pay the higher price when you buy and get the lower price when you sell. The market makers (traders / investment banks) take the other side of you purchase and sale transaction. Their risk is in the price movement of the security while they hold waiting to sell to another investor. Their may generate gains or losses on this trading activity.
2. Corporate Finance. They provide strategic, structuring, and financial advice for a fee. Usually this fee reflects the size and complexity of the transaction.
3. Underwriting. The purchase they shares or debt issued by a company with the intent to resell to the market (usually through a group of investment banks, called a syndicate). For this sevice they are paid the underwriter's discount on the issue.
4. Investment Management. The are paid fees for managing money – mutual funds, hedge funds, private equity funds, real estate funds – for their clients.
5. Investing. Many investment banks invest their own capital in securities or companies with the expectation of making a profit, just like any other investor.