Why Every Business Owner Must Understand Financial Markets

Why Every Business Owner Must Understand Financial Markets
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If you have ever wondered why your business has periods where it performs really well, achieves growth and a healthy profit, but sometimes it underperforms, stagnates and profits take a hit, then you may not need to look further than the health of the wider economy. The way the national and indeed the global economy is performing affects businesses both large and small. So what forces dictate the health of domestic and global economies?

The Stock Market

The way the stock market is performing affects how financially secure the general public are feeling in terms of their own personal finances. A bullish market is one where investors portfolios, that is to say the stocks and shares they own are becoming more valuable, this promotes consumer confidence and leads to people spending money, hence your business performs well. A bearish market is quite the opposite, investor’s portfolios are dropping in value, as a result they will spend less and your business may suffer as a consequence. Understanding how the financial markets work is vital for any business owner as it allows them to make provisions that compensate for how the markets are performing over time. If you are a retailer, for example, may want to carry more stock if the markets are performing particularly well.

Diversification of Income Streams

Another good reason why it is essential for business owners to understand the financial markets is because it may provide a way for them to diversify their income streams. Investing a proportion of business profits through avenues such as share dealing can prove to be a really good way to make profit out of profit. Shares bought and held over a long period of time typically outperform keeping your capital in a cash savings account and due to the low commissions, you have the flexibility of being able to sell your existing shares and buy new shares that you think will provide you with a better return. Remember that as well as buying stocks in anticipation that they will go up, you can also buy stocks in anticipation that they will fall and this is called shorting. Knowing when to buy and when to short is the key to making profits and relies on a number of factors; you need to study the stock prices over time using technical chart analysis, be able to spot a trend, “the trend is your friend” and have your eye on the latest business and political news.

The Bigger Picture

The markets are inextricably linked to global politics. Recently the markets slumped massively after the announcement that the UK had voted to leave the European Union. The shock waves travelled right through the world markets, for example, sterling dropped dramatically, leaving some businesses, particularly those involved in importing and exporting, out of pocket. So to understand the markets properly, you must also be aware of the bigger picture and the repercussions political decisions can have on business and the markets. Doing so will leave you in a better position from which to judge the climate and plan your business strategy accordingly.

Bargain Hunting

When big political or business news is announced, there is often a reaction from the markets and in turn there are opportunities for business owners and traders alike. For example, if it is announced that a significant investment has been made in a particular country, then property developers may look at this as an opportunity to take on projects in that country, whilst a trader may look to buy some of the country’s currency at a low price in the hope that the news will make it go up in price. The concept works both ways of course and one man’s loss can be another man’s gain so seeking out both positive and negative news can lead you to a great bargain.

So if you are a business owner, it makes good sense to have a close eye on the financial markets and understand how their performance affects the way your business performs. Doing this can help you run a more streamlined and effective operation and give you the chance to build on your success by investing your profits. Or put another way, instead of letting the financial markets dictate the way your business is performing, you take control and make the markets work for you.