You have probably heard the word “economy” discussed in the news. It sounds important, but what does that mean and how does it relate to you and your investments?
To understand it better, think about our country. The US measures its Gross Domestic Product (GDP) which is the total of goods and services that it produces. This can go up or down every year, but everyone hopes that it increases. When the country is producing more, this is generally better for everyone!
Now think about the companies in our economy. Companies always want to show that they are making a profit. This is usually done in three ways:
1. Sell more. The company can increase their overall profits for the year through higher volume of sales. They hope that customers like the products or services and want to purchase more every year.
2. Cut expenses. The company can look for ways to lower its cost of producing goods in order to lower its overall costs. Additionally, we have all seen companies go through layoffs when they reign in expenses by letting go of part of their workforce. need to
3. Raise prices. The company might begin to charge more for their product to increase their profits. One recent example of this can be seen just this year when the US Postal Service raised the price of their Forever stamp by 10% from $0.50 to $0.55 cents. If you think about your favorite foods or products, you will probably be able to remember similar price increases as well.
When companies are doing well, people will generally want to purchase their stock. And when they are losing profits, people tend to let go of their stock holdings. When individuals are buying up lots of a company’s stock, this will in turn tend to increase the price of the stock, while selling lots of a company’s stock will typically drive the price down.
The trade wars with China could put a damper on the US economy. If it costs businesses more to get Chinese product to the US, then the businesses may have to charge more to consumers. Then we have a cycle of consumers demanding more pay and other businesses charging more for their product or cutting back on expenses. If those tactics don't work, then the share prices of companies may decline.
One stark example of a successful stock is that of Berkshire owned by Warren Buffet. When we looked at the stock price it was sitting at $312,900… for one share! On the other hand, when we looked at the price for Sears stock, this was currently being sold for $0.58. Sears used to be a large, profitable business, but as they become closer to going out of business, individuals have sold their stocks and the share price has plummeted. When you are investing in company stocks, you want these to be going up in value!
With supply and demand of products, you will also see inflation causing rising prices every year as well. With inflation typically hovering around 3%, we would want to look for returns above this (for example 6 or 7%).
There you have it! When you hear “economy” tossed around on the news, now you will be knowledgeable about this topic and understand what it means to businesses and ultimately to you and your investments!