To start investing, you need to understand macroeconomics. Many people are interested in investing but feel overwhelmed about where to start. However, studying macroeconomics, or the overall economy, is always the first step. Simply put, macroeconomics is about understanding the investment environment. By understanding the investment environment, you can increase your chances of success.
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1. Macro and Micro: The Importance of Understanding
Macroeconomics analyzes the overall economy, while microeconomics analyzes individual companies. The top-down and bottom-up approaches are representative methods. The top-down approach looks at the big picture first to find favorable sectors and companies. On the other hand, the bottom-up approach analyzes the performance and potential of individual companies to invest.
- Importance of Top-Down Analysis: Let’s take a soccer match as an example. Looking at past records alone, Korea might seem to have an advantage over Middle Eastern teams, but if the game is played in the Middle East, the environment changes. Considering the environmental factor of playing in the Middle East, the match prediction can change.
- Strength of Bottom-Up Analysis: It analyzes the performance and growth of individual companies to find those that perform well regardless of the environment. However, it cannot help but be sensitive to environmental changes.
2. Why Macroeconomics is Important
Macroeconomics is crucial when determining the favorability of the investment environment. This is why the results of the Federal Open Market Committee (FOMC) meetings in the United States are important; economic environments like interest rates significantly impact investments.
Past Examples
Let’s look back at the 2008 global financial crisis and the 2020 COVID-19 pandemic. In both cases, changes in macroeconomics had a significant impact on financial markets. During the financial crisis, American investment banks sold foreign assets to secure cash, which also had a considerable effect on the Korean stock and real estate markets. During the pandemic, there was also a phenomenon of selling all assets to secure cash.
3. The Effect of Studying Macroeconomics
Understanding macroeconomics can increase your chances of investment success. For example, big tech companies in the United States always seem to perform well, but they faced difficulties in 2022 due to inflation and rapid interest rate hikes. Therefore, understanding macroeconomics can help reduce such risks.
No Company Always Wins
When the macro environment becomes unfavorable, any company can struggle. When there is a change or crisis in the financial system, macro analysis can help you invest in a favorable environment.
Conclusion
Macroeconomics is a crucial factor in increasing the chances of investment success. To increase your understanding of investments and your chances of success, you need to study macroeconomics. Investment is a complex activity that requires consideration of the overall economic environment, not just the analysis of individual companies. By understanding macroeconomics, you can make more stable and successful investments.