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Breaking Down 5 Finance Terms That Effect Your Investments

Breaking Down 5 Finance Terms That Effect Your Investments June 29, 20182 Comments

Investing is bound to change the way your money moves. It may be on the upswing or going down the drain. Naturally we don’t want the latter. However unfortunately, the success of your investments may be affected by several factors beyond your control. Today, we’re going to look at five financial terms used in the global economy. Each of these may create a significant impact on your investments.

The Importance of Thinking Globally in Terms of Investments

When you put your money in a particular investment – whether it’s in a bank, financial institution, or a tangible asset – you may think that you can cover all the bases to ensure that it won’t be a lost cause in the long run. You may study local aspects of the investment, some of which you may actually have a hand on.

However, most local economies link directly to a global scale. What may seem like a relatively simple and local investment is actually a part of a worldwide economic tide that you have absolutely no control over.

In other words, every time you invest on something, it’s important to study how that particular investment is affected by national and global factors.

5 Financial Terms That May Affect Your Investments

Before you put all of your eggs into a seemingly secure local investment, make sure that you understand these five finance terminologies that may actually make your money vulnerable:

1. Stocks

It may seem easy to invest in stocks by U.S. companies due to your familiarity with them. Looking at the stock market of other countries may be worth doing as well. After all, world economies are already interlinked with each other, such as when one country’s financial failure boosts the success of another.

What to watch out for: If you’re planning to invest in international stocks, it’s a good idea to check the gross domestic product of the country and its pattern alongside the stock market. Although there may be no direct correlation between GDP and stocks, understand that equities are more inclined towards the future. This bodes well for you, in case you’re planning for long-term investing in the stock market.

2. Reversion to the Mean

Speaking of stocks, you may already be investing in either of two groups of equities. The first is growth stocks, or those coming from fast-growing firms. The other is value stocks, which come from long-time companies that have been either overlooked or beat down.

Which group of stocks would you invest in? Most people would choose growth stocks – and you would be wise to do that. However, financial analysts are now recently discovering a term that is “reversion to the mean” or returning to an average value.

In a nutshell, here’s what may happen: At some point, growth stocks may hit a ceiling, go down, and fluctuate back up until it reaches an average level. In the same way, value stocks may stop crashing and suddenly turn up for the better. There may come a point when value stocks may actually become more lucrative than those from fast-growing companies.

What to watch out for: This financial trend is meant for long-term investors more than those who are looking for a quick buck. Experts are predicting that some value stocks such as inflation-protected bond funds and energy funds may surge upwards.

3. Bonds

Unlike the loose relationship between stocks and GDP, bonds tend to have a more fixed link with the latter. A country’s economic growth causes a natural progression towards capital expenditure for projects, which requires money. This cash competition may cause interest rates to rise, leading to the decrease in the price of bonds.

What to watch out for: Aside from monitoring GDP, look closely at interest rates before investing in bonds. High interest rates lower the borrowing capacity of investors, which consequently brings down bond price and demand. Therefore you may want to invest in short-term bonds rather than long-term bonds, because the latter experiences the brunt of high interest rates more.

4. Trade War

Trump’s latest tirades on NAFTA and China may trigger a trade war that may sound too global for local investors to worry about, but it’s a real-world danger that needs to be looked into.

A potential trade war between the U.S. and China may spring from Trump’s recent accusation of unfair trade practices by China and his declaration to increase export tariffs against the Asian economic giant. If this escalates, this will create a negative ripple effect on economies in Asia and even the U.S. This is something that no investor – both local and global – may be thinking about right now, but really should.

What to watch out for: While this isn’t happening yet – and even as Trump is still not closing his door on NAFTA – you may need to cast your investments with a wider net. You don’t want to put all of your eggs in a single basket. Or a looming global trade war will tear all of it apart.

5. Urbanization

Although not necessarily a financial term, this particular factor makes a significantly huge impact on the global economy. While the U.S. and other first-world countries are highly urbanized, developing countries are still on the road towards that goal. This creates a growth spurt that opens up massive opportunities to create skyrocketing investments.

What to watch out for: You would miss out on this golden opportunity on huge and steady growth if you fail to invest in traditional infrastructure projects. This also goes for stocks of multinational companies, and e-commerce.

All in all, when you look at the big picture, you really cannot control every single factor that will affect the integrity and security of your investments. However, you can always prepare for the worst. By first knowing the global factors that may affect your investments, and make sure that you have a plan B (and even a plan C).

By studying these five finance terms and taking them to heart, you should be able to place your money on the best possible investments and protect them as much as you can.

 

Image source: https://pixabay.com/en/umbrella-economy-sure-idea-rain-2904775/

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