Microeconomics Versus Macroeconomics As Tools For Making Investment Decisions

While microeconomics takes cognizance of what is happening in the company you want to invest in and specific market dynamics like demand and supply, macroeconomics is concerned with how economy-wide issues affects your investments.

A huge percentage of whether you succeed or fail at an investment lies in the investment decisions you make. These investment decisions could cut across a wide spectrum and two broad areas they fall under are microeconomics and macroeconomics.

You’re probably wondering what economic theories have to do with investing in the stock market, but it’s pretty straightforward. It is as simple as deciding on which factors to pay more attention to when investing – those that are in smaller identifiable areas or those within the wider context.

Microeconomics is defined as the study of how individuals, households and companies behave when it comes to making decisions and allocating resources.

It is what is used to determine the demand and supply of good and services, the prices and the market’s role in price-setting, how individuals or in this case, investors make decisions in the stock market, why similar stocks are priced differently, and the best ways for individuals to work together to attain their goals.

Macroeconomics on the other hand refers to the wider context. That is, it seeks to identify changes in the large-scale or general economic factors, like inflation, interest rates, national productivity, unemployment, growth rate, gross domestic product, etc., and how it affects us.

It, thus, studies the behaviour and of our economy as a whole together with how it performs.

In other words, while microeconomics takes cognizance of what is happening in the company you want to invest in and specific market dynamics like demand and supply, macroeconomics is concerned with how economy-wide issues affects your investments.

When making investment decisions, there is no doubt that considering both factors is the way to go. However, when it comes to deciding on which factors are the most important, which should be the main focus?

Short answer? Microeconomics. Here’s Why:

Even on general terms, microeconomics is regarded as a more holistic science than macroeconomics. While this is probably ironic as it is macroeconomics that affects the general factors, the truth is that there is no point worrying about what’s happening nationally or globally when the company you are investing in is bad.

Microeconomics is more concerned with the competitive edge your company has over the other, changes made within the industry you are investing in and so on. As an investor, macroeconomics does very little in terms of helping you make relevant decisions.

It will be really hard to try to predict or try to assess the economy itself because even when the economy works, if you ignore the little details you should have picked up on, your will still be at a loss.

Also, on the flip side, even when the economy itself doesn’t work or has a number of issues plaguing it, an industry within the economy might still function well or might even function better. An example is choosing not to invest in a company because inflation rates of the entire economy is high.

While there are also situations where people believe otherwise, trying to make decisions based on how the economy works will leave you with nothing tangible to hang on to.

It is, however, a good idea to follow up with wider economic news even as you focus on understanding the dynamics of the industry you have a stake in. Stay investing!

Written by Lawretta Egba.