How Finance Helps Investors - Essay Example

Disciplinary Literacies Introduction My major is Finance. Finance is very crucial in analyzing past market trendsand forecasting the performance of the economy in different markets and countries. This paper will therefore discuss the purpose of finance in analyzing past economic performance and predicting the future of those economies. The discussion will focused on two sources namely UCLA Anderson Predicts Slow GDP Growth Throughout 2012 and the third estimates for the first quarter of 2012. The paper will also discuss on how an investor can know how to invest and how the economy as a whole is going as well as the value of Finance major. Analysis of past economy Analyzing the past economy of any country is of great help to investors as it is from the past economy performance that the future is predicted (The Economist 41). This means that the future economic performance of a country can be forecasted using its historical performance. However, it is not certain that a high performing economy will continue performing well in the future. Finance is therefore quite useful in analyzing the historical performance of a given economy. The GDP performance in USA was high during the first quarter of the year. For example, during the first quarter of 2012, there was a 1.9% increase in the annual rate (Christopher 1). The economy seemed to have been performing well during the first quarter with the country recording increase in personal saving rate, corporate profits, real disposable personal income and real GDP. Consumer spending also increased during this period which was coupled with acceleration in residential investment, slowed inventory investment, increased export, slowed imports and decreased government spending. This is according to the third estimates for the first quarter of 2012 scholarly journal. To investors, this is a clear indication of high performing market and also means that the country has the ability to effectively compete with other performing countries. The corporate profits experienced in the US economy, and the market are a good economic indicator which is used to gauge the corporate health, assess the investment conditions and to analyze the effect on corporations of economic conditions and polices (Christopher 4). The increased corporate profits are also a measure or an indicator of increased income. This sounds well to investors as it gives them explicit information on the market trends hence able to know to invest in the markets of the country (The Economist 50). The increased corporate profits for the country attract new investors as they are assured of better returns from their investments. The value of finance major in this case is to help the investor use the market trends given, analyze all the risks associated with any investments in the given country and then make a sound decision on whether to invest in the country or not. The investor will also be able to understand past economic cycles which may in one way or the way indicate the future economic cycles expected in the market. Finance helps investors to determine the strengths and weaknesses which existed in the market/economy they intend to invest in. For example, the corporate profits in US decreased by $6.4 billion during the first quarter after it had increases by $16.8 billion (Christopher 1-2). Though the country recorded an increase, the increase was less than the previous one a situation which may be attributed to poor governance. Poor governance results into corruption, poor management of resources and poor business regulation which ultimately leads to a reduction in the business operations hence reduced profits. Though the corporate profit increased at a decreasing rate, the investor can be able to make a decision to invest in the country given that all the constituents of corporate profits had increased at a significant rate during the period. Despite of its weaknesses, the economy at large performed well during the first quarter and with this performance, the investor needs to get into that market with the best strategies on how to earn profit at an increasing rate. Finance can also help investors to determine the strengths of the economy prior to investment decisions. The strength of the US economy during the first quarter of 2012 was the rise in GDP by an annual rate of 1.9% (Christopher 1). With the use of finance, the investor can examine the effectiveness of the previous performance of the economy in terms of its Gross Domestic Product (GDP), the competitive position of the economy and the ability of the economy to generated cash in the future. With the increase in GDP in the past, the investor will be able to determine the capability of the US economy by using all the factors which are used in the calculation of GDP like the household income, personal savings, and expenditure rate among many others (The Economist 55). In the past (first quarter of 2012), the US economy seems to have performed excellently a situation which may attract new investors. With the increase in GDP, the investor will understand the market potential which will determine what kind of investment to get into. With the market having performed so well in the past, an investor willing to venture into the US market need to perform a thoroughly analysis of the past and come up with the best market entry strategy which would help them to work hard based on the strengths of the economy and look for ways on improving the weaknesses. Prediction of the future Predicting the future of an economy is very important as it helps investors to evaluate the market in terms of its likely future performance hence guiding them on how to go about with their investment business. UCLA Anderson had predicted a slow GDP in USA through out 2012. The forecast experts expected to notice a 1.3% growth in GDP during the third quarter of the year and 1.5% in the fourth quarter. The experts also predicted a more than 2% growth in GDP in 2013 and more than 3% in 2014. Though the country experienced a 1.9% increase in it its annual GDP during the first quarter of 2012, expects predicted a slow growth during the third quarter. Having analyzed the past economic performance, it is important to use finance major in predicting the future performance of the economy. However, an investor should use both the past and the forecasted performance in order to know how to invest in the market as this will give the investor a clear picture of how the economy is performing and how it is likely to perform hence the investment decision (The Economist 50). For example, the UCLA Anderson predicted an increase in the US economic growth in the third quarter. The past performance of the same economy during the first quarter indicated a vibrant economy and this would mean that the economic performance creates a conducive environment for investment as the investor is assured of returns. The forecasted information is quite useful for investors as they will be able to understand the likely future performance of the economy which would then dictate their investment decisions. California had forecasted a slight and slow gain in employment through 2012 which would be coupled with a faster paced growth throughout the forecasted period. The national forecast also forecasted that the economy will continue on being sluggish due to the low points experienced from the Great Recession of 2009. With this forecasts, the investor will fully understand the likely market performance and should then be able to weigh options on whether to go on investing in the country or not. The investment decisions will be guided by the knowledge of finance based on economic indicators and their usefulness in analyzing the economy and market. Predicting the future of an economy also helps the investor to understand the strengths and weaknesses of the economy. Shulman predicted an unemployment rate of 8% for the next three and half years from the third quarter of 2012. Shulman further explains that a job order of 160,000 per month in 2013 will not sufficient enough to make any real dent in the unemployment rate. The high unemployment rate is an indication of an economy which is undergoing a recession or economic slowdown. The forecasted unemployment rate is quite helpful to a potential investor as they will understand that the higher the unemployment rate, the lower is the rate of household income which would then lead to a reduction in consumption. Though the past performance of the economy may have been excellent, the future forecasts may not appear quite appealing to the investor (The Economist 60). Any investor willing to invest in the country will have to a further market research to determine the consumption rate and household income in the country as this will determine the volume of profits they will expect from their investments. Conclusion Investors use finance, and the knowledge obtained from finance to judge a market or a country from its past performance and the predicted future performance in order to determine whether to invest in the country. The past performance of any given economy as well as it predicted future is crucial in determining how the economy is going. Even though, investors can use both the past performance and the predicted future performance in analyzing the economy or market, it is important for investors to use diversification before making their final investment decision. For example, an economy may be going through a financial crisis or an economic down turns because of the prevailing conditions like the Great Recession in the US. However, despite these conditions, the market may be portraying a potential for growth though in the long run. This calls for a thorough market analysis in order to make a worthy investment decisions. Moreover, the investment decisions to be made by the investor depend on the kind of business venture (The Economist 60). For example, some businesses may take like 2-3 years before it starts to make good returns. Considering the economic potential in the given country in the future, the investor may choose to go on with the business venture with hopes that by the time the business starts to make good returns, the economy will have stabilized. It is also quite important for the investor to integrate different economic statistics from the country of choice to aid in decision making. This is because the market usually react to these economic indicators depending on the indicator itself, the business contraction/expansion cycle as well the reaction of policy makers to the economies structural changes. It is also important for the investor to evaluate the validity, timeliness and reliability of the provided information on past performance and the forecasted performance. Works Cited Swann, Christopher. "GDP and the Economy: Third Estimates for the First Quarter of 2012." Survey of Current Business 92.7 (2012): 1-5. PAIS International. Web. 23 Feb. 2013. "UCLA Anderson Predicts Slow GDP Growth Throughout 2012." Entertainment Close - Up (2012) ABI/INFORM Complete. 23 Feb. 2013. The Economist. Guide to Economic Indicators: Making Sense of Economics. John Wiley & Sons, 2011, pg 41-60 Read More