The Universe of Economics
Economics is the science of analyzing the production, distribution, and consumption of goods and services. In other words, what choices people make and how and why they make them when making purchases.
The study of economics can be subcategorized into microeconomics and macroeconomics. Microeconomics is the study of economics at the individual or business level; how individual people or businesses behave given scarcity and government intervention. Microeconomics includes concepts such as supply and demand, price elasticity, quantity demanded, and quantity supplied. Macroeconomics is the study of the performance and structure of the whole economy rather than individual markets. Macroeconomics includes concepts such as inflation, international trade, unemployment, and national consumption and production.
Scarcity is the basic economic problem and reason why the science or some can call art of Economics ever existed. We all have UNLIMITED NEEDS with only LIMITED RESOURCES. That little fact defined the irrefutable law of Supply & Demand. The ONLY driver to any Price Change.
In economics, marginal means the impact of a small, or one-unit, change. How much better off will you be with one additional unit? As a rational thinker, you will continue to increase the variable until the additional (marginal) benefit gained from the last small increase is no less than the additional (marginal) cost of the last small increase.
The only way to overcome the basic economic problem of scarcity is by investing. This can be categorized in two main forms; direct investment (buying an investment asset yourself) and indirect investment (owning a share in a pool that invests).
What is Investment?
Investment is the commitment of capital (money) resources for some time in order to a gain higher return in the future. Can be in infinite number of forms but each and every investment holds a certain amount of risk. The amount of risk is directly related to the potential profits or projected ROI (Return on Investment).
A simple example of an investment you’re making right now (even with no money directly involved) is your time spent reading this (which is money indirectly given that TIME is mankind’s most precious asset). In this case your ROI shall be the added value of useful knowledge. Your risk is time wasted if information came wrongful or irrelevant to your personal interest.
When considering an investment; anyone should measure a simple ratio of it’s Risk-to-Return. For the same example; is this subject worth 15 mins of my time to read about? This is how simple it is .. In more monetary related investments; this ratio should be in figures. Example 2; a certain project or a stock has an upside potential of 10% and a downside risk of 10%. Would you consider that as an opportunity? Answer is NO. If it had an upside of 20% and a downside of 10% may just be an opportunity but not that attractive. Starting 1:3 then we are talking.
Even though some books refer to money in the bank as a risk-free investment; this ain’t my school. From what I learnt this is called Saving and that’s the opposite and alternative to investing. Also there’s no such thing as risk-free (that’s only theoretical) in real life; everything holds a certain amount of risk however money in banks comes with the minimal Risk so analysts just ease their calculations by considering it 0.
Bank’s interest is the benchmark to any investment. Simply the risk you’re taking is for the extra return above the bank’s interest on your project. In a booming / healthy market you should target X 3 to 4 times the bank’s return. In other words target what banks offers in a year in a quarter. Conversely should be ok to accept the annual interest amount as your Risk.
Investing in the Stocks
What’s the Stock or Capital Market ?
Simply it’s just the marketplace for Public Limited Companies (Plc’s). Usually these are the country’s biggest and most well known companies.
They trade in the form of money instruments that investors (individuals and institutions) buy and sell everyday. The most common forms of money instruments traded in stock exchanges (specially in our region’s) are Stocks and Bonds. Now ETF’s are starting to appear, however in more developed and advanced market there are other forms such as Options and Futures.
Some say its the mirror of any country’s economy.
Stocks are the company shares that people own to represent there amount of ownership in the company. Stockholders have voting rights in AGMs and share the potential and risk of the company’s end of year profit or loss.
Bonds are timed debt instruments. When you buy a bond; you have actually lent the issuing company and do not own a share in it nor hold the same risk as the stock. You’re entitled to your money back plus a pre-determined yield at maturity. (like interest over a certain period of time usually 3 – 5 years)
Options are dated contracts that you buy the right to exercise a certain transaction at a given date. If the transaction is not in your favor at it’s maturity date you may not exercise it but lose the price of the option.
Futures are also dated contracts that you deal on one day but exercise the transaction on a future date.
ETFs (Exchange Traded Funds) The most significant and revolutionary product in decades. Just like mutual funds but with the ability to trade just like any normal stock. Can be formulated to invest in anything but must be specified before issuance.
Moderator / Regulator
Define Target & Accepted Risk
It all starts with defining your own self, needs, goals and risk tolerance. These have no right or wrong answers. They differ from one person to another and change over time even for the same person. It’s very important to build your investment plan / portfolio to comply with your current status and financial situation.
A professional portfolio must consist of all types of financial instruments, those with high risk, low risk, fixed income, capital gain and some intended for long and some for short term. The percentage of each within is determined by the character and needs of each investor
Questions to ask yourself
What type of a person are you?
– Risk Taker
– Risk Averse
– Moderate / Balanced
What's your investment Goal(s) ?
– Fixed income
– Capital Gains
What's your investment Period ?
– Short Term (3-6 months)
– Medium Term (6-12 months)
– Long Term (More than 1 year)
How much Risk can you handle?
As mentioned any investment is a tradeoff between Risk and Return. Aiming high must come with accepting high levels of risk. You can set your own limits specially on the downside by accepting losses up-to a certain extent then applying something called Stop Loss when you reach your preset level of accepted risk.
– Only use excess capital for high risk purposes
– Spread your risk; diversify on different sectors
– Research and analyze before taking any decision and before trading hours; not during.
– Avoid Rumors; significant insider info, stock news show up in charts; wait for confirmations.
– Think Long Term; it’s shorter than you think
– Follow up thoroughly on your investments, don’t rely on anyone
No matter the method of Analysis used nor the order used Top Down or Bottum Up . There must be a hierarchy to your research and you’ll see just why
Every level affects the one below. Example; any change in laws or government regulations affects the whole country / market. Any change in an industry affects all the companies in that industry. Any change even a major one in any company would only affect the company itself and have a minor effect if any on the industry or market as a whole.
A Smart Buy/Sell decision comes with confirmations from every stage.
Methods of Analysis
How to select your stocks ?
There are Only Two Methods of Analysis; using either one is ok. Understanding both is definitely a plus. Compiling both in your research is BEST. Knowing when/where to use each is IDEAL.
THEY DO NOT COMPETE BUT COMPLETE ONE ANOTHER
FA is the study of numbers of the overall economy, industry and company financials to measure a stock's intrinsic / true value.
TA is the study of market action (performance) of any underline generated by analyzing the traded Price and Volume
The OPTIMAL APPROACH is to use Fundamentals to chose WHAT to buy. Technicians decide WHEN to buy
Many investors subscribe strictly to the fundamental approach of investing .The method only delves into the internal qualities of the underlying company. It does not take into consideration timing entry and exit points and above all the imbalances of supply and demand on that very same stock / underline.
Thus we are proud to present you with the methodology that best depicts the battle between Supply and Demand from first glance. The clearest, easiest to understand and simplest charting method once understood. A Lost Art discovered over a hundred years ago by Charles Dow as a figuring method and developed ever since to become the Point and Figure method we know today.