Your vote really does count. Understanding Politics and how it impacts your stocks.
Unless you’ve been living under a rock this week (or very far from a Polling Station), you’ll know that this week saw a ‘Local Election’ in various towns and cities across the country. This saw the chance for many a local Councillor to bid (or fight!) for their seat in Government.
So what does that have to do with the price of bread? Or the Stock Market?! Well, as well as having a very direct impact on the price of bread, issues on the political landscape can actually have a pretty sizeable effect on the Stock Market! And so we begin…
Whilst local elections can have a huge impact on the area around you, in the grand scheme of things, they shouldn’t necessarily have a huge impact on the Stock Market. Really, in the big, bad world of Politics, local elections are considered pretty small fry.
Other events however, such as a General Election, can affect the future of the entire Country and can therefore have a massive impact. So what’s that got to do with the Stock Market?
Events within the Political sphere can have a big impact on the strength of the pound. (This pretty much means how well our glorious pound is performing in comparison to other currencies). If people are feeling good about the UK and the hands holding onto the purse strings, the Pound is likely to be performing pretty well. If we’re not? Well – you do the Math.
The Stock Market’s performance is based very heavily on the strength of our glorious pound, mainly due to the fact that its position gives a fairly strong indicator of how our economy is looking.
If the strength of the pound is plummeting, there’s a very good chance that our faith in the future of our economy is doing the exact same. If it’s on the up? (Also known as experiencing a rally), things are looking pretty A-OK.
Now it’s worth remembering here, we can be a very temperamental bunch. As a Nation, we can be pretty adverse to change and so it doesn’t take much to get us sounding out the alarm bells. This tends to mean that when political change is in sight, or in action, the Stock Market can become very volatile. (A volatile Stock Market is a Stock Market experiencing extreme highs and lows, often in pretty quick succession). However, volatility doesn’t necessarily have to spell out disaster. If you do your homework beforehand and keep on getting that revision under your belt it could actually mean quite the opposite.
Knowing your current (and potential) Stocks like the back of your hand is a pretty sure way of giving your investment portfolio the very best chance of success. If you know your Stocks well enough, you’ll know when to spot opportunity. So how do we mean?
If the market is going through a particularly volatile patch and your Stocks hit the mother of all lows – it might not necessarily mean it’s time to action the ejection seat. If a change in Parliament has sent the Market into a frenzy – take a step back.
Have the fundamental foundations that made you buy that Stock in the first place been sent into array? Have policy changes been made that could put the stoppers to your Stocks primary way of business? If not, what you could have is the chance to top up your portfolio at a very tempting price.
As well as spotting opportunity, it’s also important to think about minimising risk. To minimise the effect that politics can have on your own portfolio, it’s always worth keeping things nice and diversified. This really is putting into play the very art of having ‘many a finger in many a pie’. If you’re covering a number of Industries, the chances of a political change impacting all of them is a lot lower than if you’ve put all of your metaphorical eggs into one basket.
Also, it doesn’t hurt to keep as up to date as possible with current affairs. It may feel like watching paint dry, but as with all investing, knowledge truly is power. So don’t be a backbencher 😉