August 20, 2009

What Is a "Flight to Quality?"

It seems that every industry has a jargon that they use in every day language. Writing across the curriculum, content specific, NCLB, AYP, detention (I believe I heard this once... may be twice), etc. In the financial world, we have numerous terms too, so today I will give you a couple to listen for in the future.

If you ever watch CNBC, Bloomberg, or Fox Business, you may have heard them say that "there has been a flight to quality occurring" or something similar. This may sound like some code, and it is for the financial world.

Simply put, a "flight to quality" is a the selling of risky investments and moving into safer investments. This can mean from international markets (which tend to be more volatile) to domestic markets or from stocks to bonds or in the case of 2008, from anything into government bonds.

Another term that sometimes coincides with "flight to quality" is "capitulation." This is a term that is used during a down cycle in the market. As the market starts to turn lower, you will have some people "capitulate" and sell out. When there is a mass of sellers, it is called "capitulation." The interesting thing about capitulation is that it usually signifies a bottom to the market. With everyone "out," the market theoretically can stabilize and start to rebuild to move higher...

Hope this helps make some sense of the jargon you hear from the media regarding the financial markets.

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