6. Lexical Card. Prepare a short talk on the following topics, using the lexical items listed below, either in written or oral form:

“The role of blue chips on the stock market” 1 brokerage (n) 2 consistent (adj) 3 diversify (n) 4 downturn (n) 5 exchange-traded fund 6 liquidity (n) 7 market capitalization 8 performance (n) 9 well-established (adj)

“The effects of manipulations on the stock market” 1 return (n) 2 track record (n) 3 underpriced (adj) 4 consecutive (adj) 5 S & P 500 6 consumer discretionary company 7 household name (n) 8 consumer staples 9 mutual fund (n)

7. Work either individually or in pairs / groups. Answer the following questions. Prepare a report, if necessary.

What are the ways of increasing shareholders’ equity? Explain the opportunities and risks. Give examples.

TEXT 3

Five Steps of a Bubble

June 02, 2010

1. Skim the text and match the pictures a-g to the paragraphs 1-7.

Pic. A

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Pic. G

§ 1. The term "bubble," in the financial context, generally refers to a situation in which the price of an asset exceeds its fundamental value by a large margin. During a bubble, prices for a financial asset or asset class are highly inflated, bearing little relation to the intrinsic value of the asset. The terms "asset price bubble," "financial bubble" or "speculative bubble" are interchangeable, and are often shortened simply to "bubble."

§ 2. Bubble Characteristics

A basic characteristic of a bubble is the suspension of disbelief by most participants during the "bubble phase." There is a failure to recognize that regular market participants and other forms of traders are engaged in a speculative exercise that is not supported by previous valuation techniques. Also, bubbles are usually identified only in retrospect, after the bubble has burst. Economist Hyman Minsky identified five stages in a typical credit cycle – displacement, boom, euphoria, profit taking and panic. Although there are various interpretations of the cycle, the general pattern of bubble activity remains fairly consistent. 

§ 3. 1. Displacement

A displacement occurs when investors get enamored by a new paradigm, such as an innovative new technology or interest rates that are historically low. A classic example of displacement is the decline in the federal funds rate from 6.5% in May, 2000, to 1% in June, 2003. Over this three-year period, the interest rate on 30-year fixed-rate mortgages fell by 2.5 percentage points to a historic lows of 5.21%, sowing the seeds for the housing bubble.

§ 4. 2. Boom

Prices rise slowly at first, following a displacement, but then gain momentum as more and more participants enter the market, setting the stage for the boom phase. During this phase, the asset in question attracts widespread media coverage. Fear of missing out on what could be a once-in-a-lifetime opportunity spurs more speculation, drawing an increasing number of participants into the fold.