Understanding the Role of Economic Indicators in Stock Trading

In this article, we will cover

• What are Economic Indicators?
• Types of Economic Indicators
• Some Important Economic Indicators
• Pros and Cons of Economic Indicators

The stock market has been a thing of talk among people ever since it came into being. While a lot of people earn heavy profits with the correct investment strategy, many beginners often fail to understand the basics of stock trading. Understanding the stock market before you invest your hard-earned money into it is a key point to consider. This is where the important aspects of trading come into play. An important term when learning the basics of stock trading is economic indicators. Being the most basic and easy-to-understand factor of the stock market, economic indicators are equally necessary to know about before investing. To define them briefly, these economic indicators are the technique of measuring data or statistics to predict the current and future activity in the market. In this article, we will thoroughly discuss these economic indicators and the role they play for a trader in the stock market. You will also get to know the various indications you get from these indicators and how to make a decision based on the analysis of these indicators.

What are Economic Indicators?

Ever since the stock market came into being, its ups and downs are constantly being monitored by companies, people, and others. The stock market constantly fluctuates depending upon the performance of companies listed over it. These fluctuations, in the long run, have created a graph pattern that, when studied, shows a common pattern that is followed by the market. Based on these factors, researchers give some indications called economic indicators. For example, if the economic indicator says that the market is about to fall, you may want to sell or prepare to buy even more.

The following are the key takeaways to understanding economic indicators better:

• These economic indicators predict how the market will behave currently and in the future based on the movement of companies in recent days and the performance of the market in the past.
• These economic indicators help you to decide what you want to do with your money.
• These indications help you get a little insight into the market to ease you in the decision-making process.

Now, three types of economic indicators are categorized based on the type of indications they give relating to the market.

Types of Economic Indicators

There are mainly three types of economic indicators in the stock market. These indicators come at a particular time every year. This is a positive point for people who eagerly wait to plan their investment strategy according to the indications given by these indicators. Let us know about them in detail.

• Leading Indicators

Leading, as the name suggests, are the type of economic indicators that lead the economic chart. This means that the data on these indicators will change before the actual economy. The data changes based on the prediction of the market and its performance in the coming days. Since it is a prediction, no one can be extremely sure that it will be exactly true. But investors still take a lot of interest in studying and knowing about the leading indicators. This is because if the prediction of these indicators went correct, then their money is going to take high jumps in the market. Some of the popular leading indicators include the yield curve, consumer durables, net business formations, share prices, and much more.

• Lagging Indicators

Contrary to the leading indicators, this category of indicators shows data after a specific event has occurred in the market. Yes, this is a major disadvantage of these indicators. This is the main reason the data these indicators show might sometimes be wrong, as it is not based on the current activity of the market. Although even after these disadvantages, the lagging indicators are used by government agencies and certain institutions to study and understand the current state of the market. Some of the popular lagging indicators include the gross national product (GNP), Consumer Price Index (CPI), interest rates, and many others.

• Coincident Indicators

The coincident indicator category is primarily focused on showing data according to the current state of the market. Without concern about the performance of the market in the past or how it will react in the future, the coincident indicators show real-time data and constantly update themselves according to the ups and downs of the market. This helps people to immediately make decisions based on the current activity and accordingly invest their money in the market. Although these indicators give some accurate predictions of the market still, the prime choice of investors is the leading indicator. Some of the popular coincident indicators include the gross domestic product (GDP), retail sales, employment levels, and others.

Some Important Economic Indicators

Based on the above category, certain major economic indicators predict the state of the market. Below are these economic indicators and the role they play in analyzing the market.

• The Stock Market

Not the most important, but the most basic economic indicator is the stock market. This is because most people directly look at the stock market before investing their money in it. Also, the stock market predicts the overall performance of the economy and how things might go in the coming days. Say, a strong market indicates that it is a good time to invest, whereas a down market may indicate that things are about to go on the wrong side.

• Gross Domestic Product (GDP)

Falling in the category of a lagging indicator, GDP is a prime indicator that people refer to. This is because GDP indicates the overall health of a nation’s economy and whether things are going in the correct or wrong direction. It also indicates the current size of the economy and how it might change. Although it can be tough to measure the GDP of a state yet, there are two ways to predict it. One is the income approach, while the other one is the expenditure method. The indicator says that an increase in GDP means more money and vice versa.

• Consumer Price Index (CPI)

Another one from the lagging category, the consumer price index, is another major indicator that is used to study the market. Rather, it is a prime aspect that is used to determine inflation in a state. This is because CPI measures how the cost of living within a state changes over time. This means that it directly keeps track of how people buy goods and services based on their prices.

• Consumer Spending

The rate at which consumers in a country spend their money on buying things is also among the major indicators of the market. This can be proven based on a report of every month which states the spending capacity of people. If people are spending less, there can be indications of recession, whereas if they are spending more, it results in higher CPI numbers.

Pros and Cons of Economic Indicators

Economic Indicators have both upsides and downsides. While they can act as a boon for someone, one wrong prediction can lead you to huge losses as well. Let us know about the pros and cons of economic indicators in detail.

Pros of Economic Indicators

The following are the advantages that economic indicators provide:

• Economic indicators often give insight into the future happenings of the market.
• Investors can make huge profits when investing their money based on these indications if they fall correctly.
• Economic indicators are mostly free, and therefore anyone can study and use them for their benefit.
• The method of calculating these indications is always the same; therefore, you can rely on any indicator without worrying about how it was calculated.

Cons of Economic Indicators

The following are certain downsides of these economic indicators:

• The predictions of economic indicators might not always be true. Therefore, depending upon them completely might sometimes lead you to lose as things can go unexpectedly.
• Economic indicators are not everyone’s cup of tea. They are often not understandable by newbie investors.
• There are a lot of factors on which these indicators rely; therefore, the chances of these indications being wrong are increased.

Conclusion

To conclude, economic indicators play a major role in predicting the position of the economy of a state. Although it has its own downsides, and therefore one must study them carefully before investing money based on these indicators. As a beginner, it can be difficult to study these indicators, but this is a common aspect unless you realize the importance of economic indicators. The basic key point is to invest wisely and to learn from the indications the market gives you. You can also consider opening a Demat account with Samco, where you can study the market easily and track all your investments in one place. With Samco, you can also invest in stocks and mutual funds when you have made your decision by studying these indicators. So sign up today and get started with your investment journey instantly.