This post is concerning the importance of related 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 email@example.com.
In economics, we learn about elasticity in several different forms such as price elasticity of demand, income elasticity of demand, elasticity and cross-elasticity of demand. In analyzing the elasticity of a certain commodity, we evaluate how influential a factor is in determining the new price or demand of the commodity. These concepts are key to understanding the effects that take place in the marketplace. George Liu wrote an important article regarding the influence of NAFTA to our economy that can be found here.
Cross-elasticity of demand explains that a rise of a substitute in consumption will result in an increase in the demand of the commodity. For example, if the price of windows laptops increase, it is likely that the demand for Macbooks will increase. Likewise, if a price of a complement decreases, the demand will increase for the related commodity. For example, if the price of ketchup decreases, the demand for hamburgers will increase.
On a micro-economic level, investors should look for similar relations. For example, if an investor expects Apple to release a new, revolutionary iPhone with an huge increase in sales, while the AAPL stock may be too expensive for the investor, an investment in a related company may be suitable. An example of this is Zaggs, a company that specializes in making screen protectors for smartphones, or Speck Products, a company that makes several different designs for iPhone cases. Likewise, if AAPL’s new phone will be taking a huge portion of sales then it is likely that the stock in competitors such as Samsung and LG will go down.
From a macro-economic stance, the effects on things such as trade agreements and government policies heavily influence the market. For example, if the government encourages further immigration, it is likely the real estate market will experience further growth.
If the stock of one competing company increases, it is likely the stock of a related company will decrease.
It is important for investors to look for relations between different investments, as well as the overall market to finding the best value and understanding why a certain investment is going up or down.
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