Costantinos Massonos, Contributor
The significance of creating a financial plan that can eventually guide athletes to financial freedom, has been reiterated in a number of articles, here on the Money Smart Athlete Blog. Being able to choose wisely when, where and how to invest money, in order for them to grow, is a very critical component of a financial plan which can help athletes meet both their short and long-term goals they set.
There is a wide array of markets in which an athlete can choose to invest their money. The main markets are Stock markets, where companies’ stocks are traded, Bond markets where participants can issue new debt or trade debt securities, Forex or Currency markets where currencies are traded and markets for physical assets such as real estate and gold. Furthermore, within the above markets, smaller submarkets may exist.
In order for any investor to be able to profit from their investment, they will need to have an understanding of how different factors or forces can drive the price of an asset upwards or downwards. This short-term or long-term flow from one price to another, called trend, is what creates profits and losses.
The four major factors that can cause a short-term trend, lasting for a few hours or days or a long-term trend that can last for over a year or a number of years, are government actions or decisions, balance of trade, speculation and expectation, and finally, supply and demand.
Governments put in place fiscal and monetary policies that can have a strong effect on the various markets. Monetary policy decisions, such as, altering interest rates, can slow or speed up the growth within an economy. Fiscal policy decisions, such as decreasing government spending can cause unemployment to increase.
A country’s balance of trade, depicts the monetary value of a country’s exports in juxtaposition with its imports. The flow of imports and exports to and from that country can affect the strength of its economy and currency. If for example, more money is leaving a country in order to import physical goods or services than the money coming in the country because of its exports, then the country’s economy and currency are weakened over time.
Financial markets are greatly affected by speculation and expectation. Each person in an economy can have their own opinion about how the economy might move in the future, and this opinion affects the decisions they take today. This cumulative expectation for the future shapes both current and future trends.
In free markets, the law of supply and demand are constantly pushing and pulling prices up and down. When demand for a product or service is high and at the same time the supply of this product decreases then prices rise. On the other hand, if supply for a product or service increases beyond demand, then the price will fall. If supply remains stable, then the price fluctuates according to demand.
While all these major factors are very different from each other, they are at the same time closely intertwined, and can separately cause both short- and long-term fluctuations in a market. When combined they can create trends. For example, a government decision which affects international trade, can create expectation for a decrease in supply for a certain product. Therefore, it is important that athletes become and stay informed of the factors causing the various market trends before they actually proceed with investing.
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