Using Economic Indicators To Make Money

One of the major factors affecting the day to day ups and downs of the stock market are based on news pertaining to specific industries or to overall economies of countries. Even though a specific report may not directly affect a specific company it may move as a result of a report because it belongs to a specific sector which has had news released. Many of the reports produced by the government and some financial institutions are known as Economic Indicators. Knowing a bit about these can help you make money.

Economic indicators are a series of data points that reflect a point in the economy. They can be specific to a sector or general to the economy as a whole. These indicators show if the economy is growing, shrinking or on the verge on changing direction. Based on these reports investors set their opinion and will invest as such.

Leading Indicators

The first type of indicator aims to pick up on economic trends before they occur. As such, they generally rise and fall before the overall economy does. Some of the more important indicators are the TSX Composite Index, New Housing Starts and New Durable Goods Orders.

Coincident Indicators

These reports generally mirror the activity that is actually taking place in the economy. GDP, retail sales and industrial production are all examples of coincident indicators. These indicators can be used to reflect on dates of inflection during the economic cycle.

Lagging Indicators

The final type of indicator change after the economy has already made a move in a direction. These lagging indicators only appear after as the economy needs time for the numbers for these reports to be created before being reported on. These are used to confirm the business cycle. The most cited lagging indicator is unemployment. Others include, business loans, inflation rate and inventory levels.

Here's How You Make Money

Coupled with the hub on making money using the economic cycle, you can base your investment decisions on reports then invest in index ETFs. Here's the step by step evaluation:

1. What Type of Indicator Is It? Knowing what type of indicator is being reported on you know where in the economic cycle you may be dealing. It will also help determine the investment timeline.
2. What Type Of News Is It? Good or Bad. This will determine your long/short buy/sell decision.
3. What Sector Does It Involve? Although a little more specific so indicators will move individual sectors more than the overall market sometimes. For example if housing starts are increasing this will affect home builders a lot more than it will a computer chip company. There are many ETF available that focus on a specific sector as opposed to covering an entire market. This would be the time to consider something like that.
4. Profit!

So there you have it. Investing doesn't have to be rocket science and by understanding some basic principles of economics you should be able to make smart investing decisions that will turn into money in the bank. Leading, coincident, and lagging indicators are all useful pieces in determining where we are in the economic cycle. From there we can figure out what products to invest in and what direction you think things will go so that we can capitalize on it.