Let’s come back to the three fundamental principles above mentioned.
We can reduce them to a single, simple question, namely: What events are likely to impact investors’ expectations regarding the future evolution of the price of my investment asset, and what will this impact look like?
This question may seem simple enough, but answering can be tricky.
The reason is that the factors that may have – and do have – a positive or negative impact on investor expectations and therefore on the prices of capital goods are simply too many and too varied. Factors may include:
- a major breakthrough in research and development which allows a pharmaceutical company to bring a much awaited vaccine on the market;
- the conclusion of a free trade agreement that offers a particular company access to new markets and customers,
- the merger of two companies that allows them to achieve a dominant position in a particular market,
- and, of course, the general economic environment, the level of interest rates, inflation and unemployment, economic forecasts and indicators, innovations in the legal and regulatory environment, etc.
Financial institutions, asset managers and investment advisors employ legions of analysts who follow closely what happens in the economy, politics and society in general and try to deduce the potential impact on financial markets. Very often there are different ways to assess the potential impact of specific events. There is rarely a single truth. Any individual investors, any brokers have their own beliefs and expectations, and that’s exactly what makes markets work.
Making wise investment decisions requires a lot of information, knowledge and, sometimes, imagination. Those who lack the time to collect, analyze and evaluate information on at least the main elements that could impact their investments would be well advised to seek professional assistance.
We said above that even a natural phenomenon can have an impact on your investment. We still owe you the explanation. Click here to read it.
