Understanding Equity and Derivative Markets

MoneyIn Economics, a market is a system where buyers and sellers interact to trade commodities and set prices. This market can be further narrowed down as a financial market which is a platform for people and firms to exchange financial instruments and securities. There are various specific functions of financial markets including finance through stocks and management of financial risks. These functions are carried out in the equity and derivative markets respectively.

An equity market is a network of financial transactions where stocks are traded and ownership of securities is allotted. It is popularly known as the stock market or stock exchange. The equity market is one of the primary methods of capital generation for firms and companies. It revolves around trading shares of ownership of a company in a public market. The movement of prices in a stock market is measured by the price indices.

The market can be further divided into primary and secondary markets. The trade in stock exchanges is done both manually and digitally. The equity market is also considered as an indicator of economic growth of the country. The dynamics of equity markets are strictly supervised by the central banks to control its volatile behavior. Over time the participants of the equity markets have shifted from individuals to institutions such as mutual funds, pension funds, insurance companies etc. Continue reading

Understanding how Investor Sentiment can Make or Break Government Policies

US Capitol DetailOver the last series of articles we have looked at how different types of government policies can have an impact on the growth of an economy as a whole. However, the successful implementation of monetary and fiscal policies is not as easy as it might initially appear on paper. By far the biggest threat to a government intervention into the economy is the consumers which it is trying to impact, and their ability to understand and evaluate those policies themselves. Specifically, if the population base of a given economy has the insight to interpret an economic policy in a way that compromises its credibility, it is possible for that plan to be undermined by the foresight of individuals within that economy itself.

As mentioned in previous articles, there are a number of ways in which personal investors can take advantage of economic policies to ensure that they benefit from the government’s involvement. However, if the government in power does not have a solid track record of implementing strong economic policies, or if the public does not actually believe that the measures being taken are enough to have a positive result in the economy, they may start taking additional measures on their own which will inadvertently counter-act the policies themselves. Continue reading

How can a Personal Investor Adapt to a Contractionary Monetary Policy

investingJust as a personal investor should take the time to adjust their personal financial position to better meet the demands of an expansionary policy, changes need to be made to reflect a Contractionary government policy. Specifically, because of the way in which such an environment will generally command higher interest rates, lower growth in private business, and possibly even an appreciation in currency values, an investor should focus on building up the integrity of their own financial position so that they can weather the ensuing costs of living.

The most obvious aspect of a Contractionary environment that an investor needs to deal with is the increasing costs of managing debt. Because of the way in which the government has taken it upon themselves to require banks to fortify their financial statements, while private business growth declines in the face of the reduced accessibility of capital, consumers will start to see that paying down their expensive debt is the strongest guaranteed investment that they can possibly make in the economy. Continue reading

How can a Personal Investor Adapt to an Expansionary Monetary Policy

nest-eggIn the last article we summarized exactly how Monetary and Fiscal policies combine to create overarching government strategies for controlling inflation, interest rates, and influencing private business and demand. This means that these strategies will actually have a direct bearing on the profitability of investments in that given economy, as well as its employment levels. Because of the significance of such policies, we need to be able to understand how it is that we can adjust our personal portfolios and employment schedule to benefit the most from different policies.

Looking at an expansionary environment, regardless of fiscal policy, the key point to remember is that the government is explicitly trying to bolster the economy by lowering interest rates, diluting the money supply with inflation. Their objective is to increase demand, private business, and therefore employment levels. Assuming there is credibility and predictability to the effort itself, there is a strong chance that foreign investors will also enter the currency region, and bolster the value of both the currency and the country’s associated investments. This means that an expansionary monetary policy is extremely conducive to borrowing, because of the cheap interest rates, and the fact that inflation will dilute out the value of the debt over time. From there, the environment is also conducive to investment, because of the way in which the government is stimulating private business and demand. Continue reading

How do Monetary Policies Combine in the Economy

bad-economyHaving looked at how it is that both monetary and fiscal policies have an individual ability to control the supply of money within an economy, and therefore the short term demand of the markets themselves, we can now look at how the individual combinations of these two policies can impact the economy as a whole in terms of interest rates, currency values, demand, and private business growth.

Expansionary Fiscal and Monetary Policies

By implementing both an expansionary monetary and fiscal monetary policy, the government is taking all measures available to increase the market’s access to money. This is accomplished by both directly stimulating the market, and improving the ability of institutions to lend. The results of this sort of strategy will be that interest rates will generally lower due to the ease of lending, while demand will increase, and private business will expand to meet that demand. From there, currency values will generally increase as foreign investors pay to invest in the growing market, and for the right to borrow the new funds. Continue reading

What is Fiscal Policy and How Does it Apply to Your Portfolio

portfolioFiscal policy represents the government’s ability to influence the economy through taxation and spending. By using tools known as ‘automatic stabilizers’, the government is able to control the fluctuations in the economy, and ensure that the business cycles therein are stabilized. The objective of these policies is to then both influence the application of funds that are directly minted in an expansionary monetary policy, and to ensure that government incomes are balanced with appropriate outflows.

In general, the goals of fiscal policies surround the stimulation of demand through either encouraging or discouraging demand. This is accomplished by examining the impacts of certain measures in light of a figure known as the market’s marginal propensity of consume. The MPC measures the market’s willingness to spend each new dollar they earn from a fiscal policy. Continue reading

Understanding Monetary Policies in Relation to Investments

Cost Value Matrix - Arrow and TargetMonetary Policies represent the actions taken by a central bank to control the supply of money and credit available in an economy. Since the supply of money and credit available to an economy will dictate the way in which the markets within will behave, it is important for a personal investor to understand how it is that the economy will react to different monetary policies, and how it is that they combine with the other aspects of the market as a whole. Once we have that understanding, we can start to look ahead at how it is that government involvement in the markets will have an impact on our personal portfolios.

Monetary policy can be considered to be expansionary, neutral, or Contractionary. An expansionary monetary policy refers to a strategy of increasing the money supply available to markets through either increased access to credit, or direct inflation. A Contractionary policy is the exact opposite of an expansionary policy, in that it aims to slow down the growth of the economy. Lastly, a neutral policy aims to maintain a constant rate of growth in the money supply in the interests of maintaining predictability. Continue reading

Combining Technical Indicators to Make Smart Financial Decision

Stock Market DiagramAs we progress through the different ways in which we can use technical indicators to improve our understanding of stock price movements, you might start to notice how it is that the indicators become increasingly subjective. This is because of the way in which all of these formulas are simply tools for evaluating the overall trends, as opposed to absolute laws of the market. It is therefore only through contextual interpretation that we can come up with a reasonable conclusion about how it is that a technical indicator might show us an opportunity. Otherwise, we might find ourselves buying into a false trend that doesn’t really make sense.

Looking at the historical success rate of swing trading strategies that rely entirely on the use of technical indicators on their own, there is a fairly uncertain picture of the outcomes. Over the short term, testing a strategy that relies on the Bollinger Bands or Stochastic Oscillators to exclusively trade the position in accordance to what the indicator would define as a trend will generally create only a few opportunities, with a general tendency towards taking a slight loss on the position. However, over time, back-tested portfolios can show as some highly favorable yearly returns. Continue reading