Asset Classes

Free investment financial education

Language

Multilingual content from IBKR

Close Navigation
Learn more about IBKR accounts
Macroeconomics: Introduction, Factors, Policies, Impact on Trading – Part VII

Macroeconomics: Introduction, Factors, Policies, Impact on Trading – Part VII

Posted June 14, 2021 at 12:56 pm
Rekhit Pachanekar
QuantInsti

The prior installments in this series are available here: Part IPart IIPart III Part IV, Part V and Part VI.

Macroeconomics and the Financial markets

Think about it, you are an investor looking to go long on a pharmaceutical company. During a recent budget session of the government, it was announced that the tax on pharmaceutical products will be reduced by 20%.

You know that this would lead to an increase in revenue for pharmaceutical companies. You will immediately buy the company’s shares. Other traders share this sentiment, and in a short time, the company’s stock price has increased. And at this time, there has been no change in the working of the company.

Let’s take another case, a company is in the growth phase and looking for expansion in other markets. Thanks to the reduction in the lending rate, the company gets access to credit and uses this money to establish a factory in another region. Since the company’s products are already in demand, traders know that the new factory will add revenue to the company. Thus, the company’s share price increases.

During the Trump administration, certain policies were formulated to promote manufacturing in the U.S. itself. This provided incentives to source locally made products instead of sourcing products from outside the country. This impacts the companies who are heavily reliant on  other countries and do not find good quality replacements among the local communities. However, a company can take advantage of these policies and cater to this market which did not exist before.

In contrast, certain economies formulate their policies to attract foreign investment. Earlier a closed economy, India opened its door to foreign investments with a series of reforms starting from 1991. This has led to economic progress and made access to foreign capital benefitting both the investors as well as the Indian companies. The IT sector has flourished due to these policies.

These were some examples of how macroeconomic factors can influence stock prices. It is well known that the US stock market experiences a short term jump every time the Federal Reserve reduces the interest rate. Thus, some traders actually schedule their trades on days the Federal Reserve schedules their meeting. You can learn more about these types of event based trading methods in our course on event-driven strategies.

How do you learn about macroeconomic factors further? Let’s see in the next section.

Visit QuantInsti for additional insight on this topic:
https://blog.quantinsti.com/macroeconomics/

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from QuantInsti and is being posted with its permission. The views expressed in this material are solely those of the author and/or QuantInsti and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Tax-Related Items (Circular 230 Notice)

The information in this material is provided for informational purposes only and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.

IBKR Campus Newsletters

This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.