EXPLAINED

Emerging Markets

  • 04 December 2019
  • 1 minute

The exact definition of what makes a particular financial market ‘emerging’ varies, but it is generally agreed that emerging markets sit somewhere between those in the least developed countries and those in the most developed countries (such as the UK and the US). Usually, emerging market economies are growing rapidly and their social conditions are evolving to become more like those of developed markets. And typically, an emerging market country will have some form of stock exchange, overseen by a regulatory body, although its standards of regulation may not be as stringent as those in a developed market equivalent.

Some emerging market governments have high levels of borrowing denominated in dollars, which means their economies will be influenced by the exchange rate between the dollar and their own currency. Others rely heavily on exports, so may be affected by a slowdown in global trade, or by stronger global economic growth.

For investors, buying or holding stocks or other assets issued by governments or companies in emerging market countries is considered to hold more risks than investing in developed market equivalents. The trade-off for taking on this additional risk is that there may be the potential to earn higher returns as a reward.

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