Economics and the stock market #investments
Most people understand the basics of economics. Recently there has been a worldwide glut of oil and so there was competition among producers that led to the oil price falling to below $50 a barrel which meant many producers were selling at a loss. Supply and demand largely dictate prices but in the case of oil, we also had to look at how much oil was stored. It will take a while before those stocks are deleted. When oil stocks are low then the oil price could soar to new heights again.
Economics of the market
Supply and demand affect the stock market too and so does sentiment, perceptions and many other factors. Some products are produced using automation and the profits are very high. The cost isn’t in production but in design and development. Once a new drug or pop song has been developed the cost of production is really low and supply is almost unlimited. Demand, however, is still limited because people only have so much money to spend. So demand can be boosted if the government prints more money.
The market this week
Today’s picture shows how the FTSE 100 has climbed this week. It is still well over 7000. I’ve beaten the index this week. Demand for shares has outstripped supply and there is some confidence about the economic future of British commerce and industry. The prices are determined by market makers, those large dealers who make a market in a particular stock. I think of them as shopkeepers with a stock of shares under the counter. When that stock of shares goes down (increased demand) they put the price up and when their stock of shares goes up (increased supply) they drop the price. They can also increase the spread, the difference between the price they pay for shares, (BID) and what they sell them at, (ASK). An increased spread tends to slow down trade and it mitigates risk if there is news due. Imagine our shopkeeper with a shop full of buyers and no sellers. He can then put the price up and increase the spread a little and make a lot more money. If the shares are selling well and his stock is being depleted rapidly then he keeps putting the price up and might cut the spread to encourage trade. If he has a shop full of people selling then the reverse is true and he cuts prices to increase his stock at a much lower price. I’m watching Solo Oil again this week and today about 8 million have been sold and 10 million bought. So the market maker has increased the price but being an AIM share he has fixed the spread at 2.63. I have known the spread on Solo Oil to be as high as 20% when market makers want to stifle trade. The economics of the market are complex and it needs to be monitored.
I don’t give financial advice but I can give investors a good tip and that is to use the power of the internet to research investments. When an RNS is issued, be sure to read it and check out the company websites. Try to read annual reports and monitor financial news. I also use Google Alerts to monitor for news on lots of factors. I have an alert on interest rates, the FTSE and on individual companies.
That’s it for this week. The value of my portfolio increased over 10% in February mainly due to Solo Oil but always remember that AIM shares are very risky! I am monitoring Solo Oil and expecting news in the next week or two. I have high hopes that my AIM pharma companies, Verona Pharma and Immupharma will come good too. I’m about 10% down on Verona and 10% up on Immupharma. Economics also affects these companies as leaving the EU could affect their potential market.