When applying for jobs with top investment firms it really helps to have a degree in economics. Why? Does it really make a big difference to what you can achieve – and if so, could it make a difference in private investing too? Trained economists don’t think quite like other people. They’re good at spotting hazards and opportunities that others overlook. Although the time and money required to get a degree may represent too large an investment in its own right to be practicable, there are lots of other ways you can get an education and it could really pay off for you.
Although you might think of economics as something obscure and academic, it deals with principles that should be at the forefront of your mind when you’re trading:
- Supply and demand – essential to understanding which stocks are likely to be profitable.
- Cause and effect – important for identifying influences and mapping trends.
- The business cycle – useful when you want to predict the best times to buy and sell.
When you study economics, you’ll also learn more about how different assets interrelate, helping you to build a more stable portfolio.
Economic theory helps you understand what you should be keeping an eye on in order to predict market movements (overall and in specific sectors). It explains how indicators like wage rates, unemployment rates, interest rates and inflation factor into those movements, giving you a much more comprehensive understanding of market activity.
Protecting your investments
When you have a better understanding of market movements, you can profit directly from them. Learning everything you need to know about trading CFDs and forex will enable you to make gains from anticipating how prices will rise or fall and how currencies will change value in relation to one another. You’ll also come to understand how you can use them for hedging in order to reduce the risks associated with your other trades, letting you invest with more confidence.
Getting an education
If you don’t want to jump in at the deep end, a good way to start learning about economics is by reading books. Stephen J Dubner and Steven Levitt’s Freakonomics is a nice, accessible introduction which relates economic principles to day to day life. Linda Yueh’s What would the great economists do? is a good introduction to macroeconomics which provides a range of perspectives instead of promoting one theory. Then there’s Henry Hazlitt’s Economics in one lesson which is old (first printed in 1946) but has continued to sell for good reason, and is particularly good for investors because it’s so grounded.
You can also find free lectures, seminars and TED Talks on economics on YouTube and Vimeo, while EdX and Coursera offer online courses with flexible hours suitable for learners at all levels. Some brokers offer videos on economics as part of the educational services available to their clients.
Even if you only have time for an hour or two of study per week, you’ll be amazed at the difference it can make to your trading success.