Micro and Macro Factors: What Every Stock Investors Must Know
Introduction: Mastering Micro and Macro Factors for Stock Investing
Why should an investor aware about microeconomics vs macroeconomics? As a stock market investor, it is very important to know the micro and macro factors and right time to invest and on right stocks. Making investment in a wrong time and to wrong business never give expected results, but may land to the the trouble by the erosion of invested capital.
Identifying right businesses is the first step for an investor followed by tracking and identifying the best time to invest on such businesses. “This is the secret of the huge success of great investors”
Here is the importance comes by knowing the micro and macro factors affecting the stock market to give exceptional opportunities to the investors. Both micro and macro factors will play crucial roles and have supreme influence to the up and down of stock markets and economy.
“What are the micro and macro factors?”
I will explain both with a simple example.
Microeconomics Factors
To make the answer clear, I would like to give a short definition on both micro and macro economic factors.
“Micro factor is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy.“
Any wrong decision by the management of the company would affect the root level of the business and most probably the business would collapse in the future.
An example is huge debt that a company cannot be able to repay.
Macroeconomics Factors
“On the other hand, studies about the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels.”
Macro factors are temporary phenomena that can change when the behavior of the stock market to a period of time.
For example, a recession or a crisis like coronavirus crisis etc.. Such crisis or issues doesn’t affect the fundamentals of good companies.
Example for Micro and Macro economics Factors:
Micro factor example:
You might have seen the trees shedding its leaves. Two reasons lead to such shedding.
First is the decaying of the root of that tree. It confirming life of the tree is going to finish and tree would not be no more after some time. This is called the micro factor.
Micro factor affect the rood of the business and would lead the business to collapse within a predictable duration.
Companies have weak fundamentals are the best example for this.
Macro factor example
In the other side of this scenario, the trees will shed it leaves, suppose before starting a winter season and to protect them self from the snow fall. Upon ending the winter season, new leaves will be appeared and the tree would come as the same before it was earlier, before the beginning of winter season.
This is called macro effect. Which is temporary and would overcome after a particular duration.
Currently the coronavirus is spreading and due to that the stock markets worldwide are dragging to the bottom level.
This is the best example of a macro affect.
Fundamentals of the best companies are still in tact, but the value of their shares are coming down due to the downward rally of its peers.
As an investor this is the time to buy stocks by considering the current macro effect to the stock market and economy.
Conclusion
“Microeconomic factors”, closely integrated to the company fundamentals and thus it have high importance. An investor must have awareness about the fundamentals of a company, how strong it is etc, before taking any investment decision.
“Micro factors” tightly connected with the product, cost and demand in the market and any negative changes on any of this would affect to the business and profit to a great extend.
Company sales growth, cost of sales, capital allocation, debt increase or decrease, market monopoly all covering under micro economic.
Macro effect is clearly a temporary behavior and would change back to normal after some time.
For your information, 98% of stock analysts and stock traders entirely depending on macro economic factors. They are generally making the report or buying shares on the recent possible changes that going to happen with nation or industry.
You can experience the same by reading analyst reports or talking to any trader in your place.
Mutual fund managers also, generally trust on macro economic factors than micro and that leading them to churn their portfolio time to time.
Any changes in micro economic factors affect to the root of a company and its performance.
As a value investor, it is advisable to keep track on a company on the basis of influential micro economic factors like what legend investor Warren Buffett does.