When it comes to investing, there is one metric that lands above all others in terms of importance…the economy. If you’ve ever tuned into a financial news network then you know that they spend countless hours scrutinizing almost every single detail of the economy. They can sometimes reference the economy as if it’s some type of higher power or supreme being.
In reality, the economy is nothing more than the total production and consumption of goods in a given region or country. However, since economic activity drives the prices of almost all asset types, it most definitely plays a crucial role in every investor’s portfolio.
Let’s take a look at what economic investment analysis is and how you can use it to your advantage.
Why the economy matters
If you’re not familiar, regular investment analysis is defined as evaluating investments, industry sectors, and economic trends in order to determine whether an investment will yield positive results. Investment analysis can include charting past returns to predict future performance and evaluating individual securities.
Economic investment analysis, on the other hand, is the process of evaluating specific economic factors to uncover potential investment opportunities.
Economic transactions are what fuel the prices of different assets. If you have a good understanding of what’s going on in the economy and use this information to invest your money then you will become a very, very rich person.
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A few common factors to look for
While conducting economic investment analysis, there are a few factors that people will pay particular attention to. Let’s take a look at what those are:
- Inflation rate – Inflation is the decrease in the purchasing power of currency over time. This is one of the main reasons that people need to invest their money. If they do not invest their money, they will slowly lose their purchasing power.
- Interest rate – This is the amount that a lender charges others for the use of assets expressed as a percentage of the principal. The Federal Reserve is constantly adjusting this rate, which impacts almost everything in the economy.
- Demand/supply – Supply and demand is the interaction between buyers and sellers of a resource. This is always fluctuating based on different factors.
- Government activity – The government is constantly changing and updating laws that impact things like taxes, wages, and how corporations can conduct business.
- Wages – A form of fixed compensation for employees. Wage increases or decreases will have different impacts on stock prices.
At first, economic investment analysis can seem incredibly overwhelming as there are so many moving pieces in a modern economy. However, once you start to learn the different pieces and how they impact asset prices, things will start to slow down. Once that happens, you are sure to have success with economic investment analysis.
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