An important thing to know about the stock market is that it is not a representation of the economy, it is not a measure of whether everything is going well or if everything is going wrong. It can be considered a measure of expectations of what will happen, of expectations of how the economy will be.
I know that people who are investors and understand this subject may find this post a bit reductionist, but there are a lot of users who understand little or nothing about economics, and I think it's an interesting topic to address.
If the stock market goes up 30%, it doesn't mean that the country has improved 30%, and it doesn't mean that it will improve 30%, it just means that those who are buying think so.
That's the key point to remember.
What is the stock exchange?
Among several things you have stock trading, commodity trading such as goods, wood, copper, cattle, cotton, corn, etc. In order not to complicate the text, let's focus on actions.
Share is basically a slice of ownership in a company. A company has 1,000 shares and I have 1, I own 1/1000 of the company, and this share entitles me to vote in some situations depending on the company and in others not, and entitles you to part of that company's profits.
So if you are going to analyze a company, those that have shares listed on the stock exchange are required to publish information about their balance sheets, investments, etc.
Let's assume that you understand a lot about meat, and you start to analyze companies that work with meat and own shares, and you see that there is a company that is currently small, but that are investing in the right way, they have a management team that seek to optimize services, lower costs for profit in the future, and that you feel that people are on the rise to consume more meat for any reason, from a country emerging from the crisis, agricultural industries with more incentive, or any other reason.
You expect that in 5 to 10 years this company, which is now small, will become a little bigger and with that it will make money, so you buy shares in that company to receive the dividends. And thinking about this long-term appreciation, the stock you bought for a lower value, in 5 or 10 years will be worth more and with that your invested capital will be valued.
What does this example show you? Future expectation.
It's an analysis of an investor who looked and thought there would be an improvement in the future, just as he can do the opposite, see a company he thinks is not doing so well and sell its stock, or bet with a short sale.
You borrow someone's stock, sell it, owe it, and when the price drops, you buy it back and give it back to the person.
These are future analyses, and they can be clouded, distorted, misled, they can have information that leads the analyst to make an incorrect investment, and this is generally done by the government, and much of this analysis is done by the Austrian school of including the economy, where it says that the government should not act, because every time it tries to intervene, it ends up distorting reality causing wrong investments.
So we understand that the stock market is a future expectation about the economy, and it is not a parallel or proportional to the economy.
This subject will be covered in two posts, to read part 2 click here.