Blog Podcast What Are The Market Forces Affecting Your Investments?

What Are The Market Forces Affecting Your Investments?

date April 27, 2021 time 8 min read 1290 views

On this episode of Alternative Investing, we’re breaking down the market forces that impact your investments. From supply and demand to international trade, we’ll address how tariffs hurt your wallet and why you should be skeptical when it comes to investment news and speculation.

Please use the Spotify link below, or if you haven’t got time, check out the transcript.

You can also listen on Apple Podcast, Deezer, Spreker and Podcast Addict

Remember: All investing involves risk. The content of the podcast is for informational purposes only and is not investment advice. Please always use caution and diversify.

CHRIS:

Hello and welcome to the 11th episode of Alternative Investing with MyConstant. I’m Chris Roper, Head of Communications at MyConstant and with me today is…

TREVOR:

I’m Trevor Kraus, Content Manager at MyConstant. 

CHRIS:

And today we’re talking about market forces. Now, I’m sure you’re all aware of market forces. They’re the forces that affect the market. Which sounds self-explanatory, but why have we chosen to do a podcast on market forces? Trevor? 

TREVOR: 

Well, we’re an investment platform so it’s important that you understand how your money is being affected by the four market forces. 

CHRIS:

That’s right. There are a number of market forces, but you can reduce them down into a few key ones. The ones that have the most impact. So, what’s our first market force? 

TREVOR:

Our first market force is supply and demand. If you’ve taken an economics course, or even if you haven’t, you’ve probably heard about it. Supply and demand is basically the interaction between suppliers and consumers, and it’s how the price of goods and services are determined.

Here’s an example. Let’s say you have unskilled workers come to a city and all the workers are willing to take jobs at low wages. Because there are more workers than jobs available, the excess supply of workers drives the wages down.  

Or, even more relevant. Let’s say you’re trying to get an Uber at 5pm. Everyones is trying to get an Uber at that time, so the price goes up. However, if you tried to get one at 4 o’clock, the price would be low or close to what it would normally be. 

CHRIS:

Right. And the same thing applies to investments such as stocks and commodities. It’s quite obvious with commodities such as gold. But with cryptocurrency like bitcoin, as we said in previous episodes, there will only ever be 21 million in existence. And right now, we’re in the process of mining all of those. 

TREVOR:

Will they make it more difficult to mine it by changing the algorithm?

CHRIS:

Yes. So every time we mine bitcoin it gets a bit harder to mine more. So the further along we get mining bitcoin, the harder it becomes to create new ones. So the supply is always going to be limited. And in that sense, if the demand rises, the price will rise. Which is why investors are predicting something in the range of 100 to 500 thousand dollars for bitcoin in the next 5 years. It’s definitely an exciting time to be in crypto. 

TREVOR:

For sure. And I’d like to add that beyond the finite number of 21 million — you have governments interfering with cryptocurrency. You have to see, are they allowing widespread crypto use in their countries? Plus, you have the media. If the media attention is good, the price goes up and if the attention is negative, the price goes down.  

CHRIS:

Yea, absolutely. If you look at stocks for example a company might do a stock split. In which they create more shares, so let’s say you had 100 shares of Apple for example, if there was a stock split you’d have 200 shares, but the price for each would be lower. 

So I think stock splits are another way for a company to generate revenue through stock sales and more people can get involved and more people can invest. And obviously if a company releases more shares then the supply increases, so naturally the price decreases as well. 

I think you touched on it a little bit Trevor. The effect of government on prices and the market. Can you go into that a bit more? 

TREVOR:

Yea. I think governments have an enormous influence on economies and in turn, your investments. Governments have monetary policies that play a big part in how a country succeeds. Whether that be increasing or decreasing interest rates or altering the interest rates on the Euro or the US dollar. Governments have control over what comes in and out of the country. 

CHRIS:

Of course, and there’s a regulatory environment as well. Some industries might be in favor. For example, if you look at Biden and compare him to Trump, you could say Biden is more interested in the renewables industry. So when Biden came into power, people were anticipating a lot of support for renewables. And in the market, people started investing in renewables. The price of the big wind generation plants and solar plants, they all went up because of the Biden presidency because it was expected that there would be a supportive environment for renewables in the US. 

TREVOR:

Is he giving subsidies to these companies that are promoting renewable energy?

CHRIS:

I’m not 100% sure, but I imagine that’s what he may do in the future. Just wait and see.

TREVOR:

I’d like to add that subsidies are a big thing with markets and economies. I’m sure you’ll bring up China at some point, but a good example would be China going through economic reforms in the 80’s and 90’s. 

During that time, the Chinese government focused on certain industries like tech and automotive, and they poured money into them and let them blossom. 

CHRIS:

You’re right. Well, I think that pretty much covers our overview of — 

TREVOR:

I don’t mean to interrupt, but going off of subsidies, I’d say that government’s can also step in when an industry is failing. You don’t have to go so far back when the US government bailed out the banks in 2008. Had they not done that, people would have been much poorer and in a worse off position.

CHRIS:

Why is that? Why would they have been poorer? 

TREVOR:

Their money would have been gone. Their investments — wiped out.

CHRIS:

Which banks were bailed out?

TREVOR:

In total there were 700 banks and all of the top 100 banks in the US were bailed out. 

CHRIS:

Interesting. Okay, so, we’ve spoken about supply and demand and we’ve spoken about government. The third market force we’re going to talk about is international trade. 

In an ideal world, free trade between countries would mean thriving economies. But this is not the way, in fact it’s often a point of contention. Tariffs wielded like weapons and accusations of slave labor and more.  

To understand how international transactions can affect markets, I want you to think about the US and China. They are the world’s largest manufacturers. China is also the US’s biggest trade partner. Listen to some of these statistics here from The Office of the United States Trade Representative. The US goods trade deficit with China was 345 billion dollars in 2019. So to understand what a trade deficit means, that is when a country imports more than it exports. So the interesting thing is, the United States has a services trade surplus — to the tune of 36 billion. But, it obviously doesn’t have enough to cover the deficit on goods. 

People often wonder why there is such a big trade deficit with China. Well, it’s mainly to do with the strength of the US consumer market. US consumers are keen on cheap goods and that’s what they demand. Historically, many goods have been imported because it’s cheaper to manufacture. 

But when Trump started slapping tariffs on imported Chinese goods, it had this terrible effect on the markets. A real ripple effect. In fact, the federal reserve bank of New York and Columbia University, found that US companies lost 1.7 trillion dollars in the price of their stocks because of the tariffs imposed. 

A tariff is a tax. So when the US adds a tax on Chinese imports, that increases the price of the goods and business who are reliant on these goods to perform their activities. It has a ripple effect. 

So as you can see, international trade has a really big effect on how companies thrive or struggle. They have to accept lower profits which could result in wage losses for employees. And this affects the market. 

So it’s important when you’re thinking about investing, to take in some of the macroeconomic factors as well as looking at what’s happening in the US. 

That said — trade disputes — they don’t always mean disaster. Tariffs can actually increase domestic production. When it’s more expensive to import goods then the country normally looks at producing the goods themselves. 

TREVOR:

And there are other countries to look into too.  

CHRIS:

You’re right. You might import from somewhere else. It can create jobs domestically. It can end up being better. But for a country as big as the US and China, any kind of trade war between the two would rarely end well. 

That gives you a bit of an intro into international trade. Now, let’s talk about speculation and market sentiment. 

Speculation refers to what people generally believe will happen in the market. This could be something broad like a recession. Or something specific like expecting a company to post record profits.   

What speculative investors do is use market sentiment to decide when to buy or sell, and this is part driven by investor behavior and part by the news. Now, new is rarely unbiased in investing. No one can predict the future. 

That means it’s become fair game for competing opinions and analysis. If you look at what the head of JP Morgan, Jamie Dimon, said about bitcoin, in 2017 he called in a fraud. And then in 2018 he said he believed in it. So people can change their opinion in the space of a year. 

Basically, when you read the news, read many different sources to build a better picture. 

TREVOR:

Yea, I’d always say to figure out who is benefiting from the information given. Who will win from this?

CHRIS:

Exactly. We’re living in an interconnected world where information travels quickly. So you just have to be careful and just read many opinions to make a balanced decision. Speculation — too much can cause bubbles. 

House market bubble, dot-com bubble, the bitcoin bubble. The subprime mortgage that collapsed in 2008/2009. Speculation is a normal part of being an investor. 

More recently, we had the short squeeze with GameStop. GameStop was heavily shorted by hedge funds. So a group on reddit tried to get everyone to buy the stock and it boosted the stock sky high. 

These big hedge funds didn’t anticipate the price of the stock getting inflated. Here, the institutional investors were just as hurt.

I think now we’ll give you some practical advice on how you can use market forces in your decision making. 

When investing, while researching a company or investment, it’s important to consider the source and whether they might have an ulterior motive. It’s something Trevor said earlier — you need to know how the person writing about a topic benefits from that information. Gather as much information as you can. Not just supporting your preconception about a stock or investment. But also some conflicting notions as well. That way you get a more balanced view. 

TREVOR:

The second factor you should consider is government. Is the government pro the industry or asset class that you’re investing in? If they’re pro — they’ll do what they can to make it thrive. And if it’s anti — then it might not be worth your while.  

CHRIS:

For sure. The Chinese government is famously anti-crypto, but most of the mining is done in China. If the Chinese decide to crack down on bitcoin mining, then that mining will shift to another country. So if you’re heavily investing in bitcoin or mining companies themselves, then action in China would affect your decision to invest more or to invest less. Or change your investment. 

Finally, the third piece of advice for you is to consider how rare or unique the thing is in which you’re investing. For example, if it’s a commodity like oil, the price will go up when the price is low. Like in the 1970’s there was the energy crisis as a result of the Iranian Revolution. During that time, oil prices went through the roof. 

But if you were heavily invested in oil during that time, you might have made lots of money. But perhaps it’s not a commodity, maybe a stock. You might want to think about the company and how unique their business model is. How easy would it be for another company to come along and do when they’re doing and do it better? 

If the technology is patented or best in its kind. You can mostly depend on that stock being a good investment — all things considered.

I think that sums up everything we wanted to say about market forces. Anything else, Trevor, that you want to say?  

TREVOR:

No. You took the oil example out of my mouth. That’s what I was going to add. I think we covered everything. 

CHRIS:

Alright, thank you for listening. Do tune in a couple weeks when we publish our next episode. 

If you have any topic suggestion you can email me at [email protected] or [email protected]  

Once again. Thanks for listening. 

TREVOR:

Thanks guys! 

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