Investment opportunities and risks in stock markets Literature review

Investment opportunities and risks in stock markets - Literature review Example With the EPFs emerging as a vital source of capital inflow for the developing countries, an array of issues arises regarding this pattern of investment. It is of prime importance to understand the diversification benefits accruing to an investor from investing in the developing countries and the returns to stocks of these emerging markets. Investors and researchers are concerned about the level of integration of these markets with the financial markets of the industrially advanced countries. Several research works have been conducted in the past to investigate about the process of integration between these markets and to understand the changes appearing in the risk-return features of emerging markets. This helps in the understanding of the individual investor’s reaction to the changes in organization of financial markets and the changes in her behaviour in favourable and unfavourable economic conditions. Sufficient research papers are available, that present their findings rel ated to the developed industrial countries. It has been found that there is a lack in recent researches concerning the stock market scenario and market returns in the emerging economies. This essay focuses on reviewing the existing literature on the risks and benefits accruing from investment activities in the developing economies and comparing it with the risks and benefits associated with investing in the advanced stock markets of the world. The diversification benefits are investigated and the correlation between the advanced and emerging stock markets is studied through this literature review. Review There are several reasons that provoke investors to seek diversified and long-term exposure to the emerging financial markets. Social as well as demographic trends are fundamental to the growth of emerging economies and the development of investment prospects in those markets. Recent researches show that the influence of the financial crisis of the US and the Euro zone has been felt more severely in the developed nations rather than on the developing countries. As a matter of fact, a few emerging financial markets are demonstrating a high degree of stability that is historically associated with the mature economies. This is an outcome of rapid evolution, which shows that the investment conditions are also evolving at a fast pace. Many investors of the developed countries such as the United States consider the emerging economies, like, Brazil, India, Russia and China to offer good investment opportunities. In fact, some other smaller markets, such as, Philippines and Indonesia, are emerging that put forward noteworthy opportunities to equity investors. But while choosing the market in which to invest, the investor require the understanding of the differences and parity among the emerging markets, and must not group them together. The investors have to weigh the currency strength of the country in which they are deciding to invest along with the stability of the country’s government (TIAA CREF, 2013). Rationale behind investing in developing countries According to Henry and Kannan (2008), two rationales emerge out of conventional theories pertaining to investment in risky assets, such as stocks, in developing countries. Th