Economics and Investing: Making money regardless of where the market is heading

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This is post one concerning the different types of investments, in a series of posts that will cover topics such as forms of investments, strategies and methods. If you have a specific request, email us at econsoc@uwaterloo.ca.

Economics covers a very broad range of categories and ideas, one of which being: investing. It is first important to know about the different factors that economics has on the market, both on a micro and macro scale, as well as the many different forms of investments. (See different forms of investments here: http://uweconsoc.com/economics-and-investing-basics/)

One common misconception involved in investing is the belief that markets have to be doing well in order to make money. This is not true. While I, and most people hope that our economy as well as the global economy is growing and more jobs are being created, it is important to know that you can make money even if the market fails. This is exemplified in the movie, “The Big Short,” for example.

Trading currencies tend to be an effective and relatively low-risk method of protecting your assets. If for example you feel that a new policy will cause the Canadian dollar to drop significantly, you may want to transfer some of your Canadian currency into a traditionally stable market such as the United States, Norway or simply investing in another asset such as gold. Likewise, if you feel that the Canadian dollar is on the rise, you may transfer your other assets and foreign currencies into more Canadian dollars.

There are many different methods of investing throughout the various stages of the business cycle, however, I will largely be focusing on longing and shorting stocks.

“Longing” stocks is the term that describes how we traditionally view investing. The basic idea of longing a stock, is to purchase a share, or multiple shares in a given company and predicting that the value of share will go up in the long run, where you can sell it for a higher price and profit the difference. This is the most common form of trading stocks. Popular markets and market determinants such as DOW Jones, TSX, NASDAQ, NYSE have demonstrated that longing is an effective method, as these markets have grown over the long run. There are of course exceptions, for example, the technology industry may be growing, yet companies that specialize in selling VCR’s and VCR machines will be losing value in their stock. Likewise, the energy market may be falling yet there will be exceptions. Another benefit of longing a stock instead of shorting it is the fact that the most amount of money one can lose from investing is the money they put it. For example, if you purchased one stock at $40 and in the very unlikely scenario they become bankrupt and the value of the stock plummets, the most you can lose is $40. Longing stocks are a popular and effective method of making money over the long run, especially with a diversified portfolio.

“Shorting” stocks, is essentially betting on a particular stock to go down in value, for supply to exceed demand. How this works is, through your broker you sell someone else’s share in a company, or multiple shares, for the current price (let’s use $40 as an example) then buy back the stock at a new price and pay the former owner back their stock. The goal is to sell the stock for more than you buy it for, for example, sell it at $40, buy it back at $20, make $20 profit. This can be a very effective trading method in a falling market or industry. However, shorting is not as popular as longing stocks for a few reasons. One is that traditionally markets have been growing over time. The more common fear though is the unlimited risk involved with shorting stocks. While in longing, you can only lose what you invest, which would be $40 in the example above, in shorting, you must eventually pay back the stock regardless of the new price. So, if in our example above, the $40 stock rises to $4000, you will lose $3960 on the trade at the minimum. Shorting is still an attractive option if you see an almost definite downgrade in a stock, for example, an accounting scandal just being reported in the media for a specific company.

It is important to keep in mind that an investor should remain disciplined and diversified regardless of their trading method.

I hope that clears up some of the more basic forms of investments, stay tuned for more information and strategies in the following weeks. Feel free to email us at econsoc@uwaterloo.ca or me personally at arracher@uwaterloo.ca for any questions or concerns.

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Hi there! My name is Alexander Racher and I am a first year student studying Economics and Business at UW, with a minor in entrepreneurship. I enjoy learning and talking about the practical uses of economics and hope to continue meeting like-minded individuals. I act as the Academic Director of Economics Society and try to make myself available for any questions you may have. Feel free to reach out!
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