As per hardening meaning, it refers to the phase when the prices of the commodities or shares rise and the Volatility falls. Hardening is also used to describe the rigorous lending terms in the insurance and banking sectors. Let’s take a look at the meaning of this concept in brief.
As mentioned above, the term hardening is commonly used to refer to the low volatility Market, in which, the prices of the stocks are rising, while the volatility keeps declining. It happens to be a good trading condition for all kinds of investors. Hardening describes a balanced and calm market. It is also a perfect time for traders to make an investment in the futures market.
While it is a perfect option for short-term and professional investors, the hardening market might not bring the best results for those who want large fluctuations in the commodity prices. This is because the hardening market is associated with less volatility, which does not facilitate large movements in the prices of stocks and commodities. It could prove to be a negative market condition for those who have invested in the commodities, the price of which falls with the volatility. This means if the volatility of the security declines, its prices will also fall.
If research is to be believed, then it is not the price fluctuations that make the futures markets extremely volatile. It is rather the leverage provided to the futures investors that makes this market volatile. Take the difference between the equity margin requirements and futures contracts, for example. The former has 50% of margin requirements, while the same for future contracts is 5 to 10 percentage. That being said, even minor movements in the prices could have a great impact on the futures investors.
The hardened market is often considered as a perfect option for short-term investors because these securities are highly likely to experience small and regular fluctuations. These movements in the price are not that hard to predict. Not only are they easy to predict, but hardened securities carry a low level of risk.
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The term hardening is also used for banking and insurance industries. It is specifically used for describing the periods of stringent financial terms. Such issues occur following major financial problems, for example, the credit crunch that occurred in 2007 and 2008.
The changes in the lending processes are used as a response to some uncertain decisions that involve the banks and financial companies. Even though the changes in the underwriting and lending standards can help stabilize the financial institution, the same can make it a bit difficult for creditworthy borrowers to obtain a loan as well as insurance. Usually, the loan and insurance approval criteria get a little difficult. Even the creditworthy and reliable borrowers have a hard time getting their loan requests approved.
Hardening seems to be only profitable for short-term investors. It helps investors purchase shares and commodities in a stable market condition.