“Unmasking the Myths of Modern Finance: Leverage the Benefits with Part 2- Indicators, Terminology, and Cutting Through the Clutter!

In Part Two of the Hoax of Modern Finance, we discuss the world of financial indicators, terminology, and the pervasive noise that can easily distract consumers from making informed financial decisions. To understand more clearly the modern finance hoax, we must first understand the techniques used to drive investors towards the wrong decisions and towards choices based on noise rather than sound financial principles. Financial Indicators At any given time, the stock market is heavily influenced by numerous trends and events. Because of this, financial advisors look for reliable indicators that may provide clues about future trends in the market and indicate possible buying or selling opportunities. Some of the most widely used financial indicators include moving averages, relative strength index, price/earnings ratio, and the consumer price index. Moving averages are a series of data points, such as stock prices or market prices in a certain sector, that are tracked over time in order to identify trends in the market. A relative strength index (RSI) is a technical analysis tool used to determine whether a security is overbought or oversold, or whether its current market price is higher or lower than its intrinsic value. Price/earnings ratio is a ratio that compares a company’s current stock price to its per-share earnings. The consumer price index (CPI) is an economic measure that tracks the average change over time in prices paid by consumers for goods and services. The Federal Reserve uses CPI data to determine changes in the nation’s overall inflation rate. Terminology Investors and traders also used specific terminology that may be difficult to understand for novice investors. These terms may include long, short, hedge, margin, leverage, and derivatives. Long refers to the buying of a security with the expectation that its price will eventually increase, resulting in a profit. Short, also known as shorting, refers to the selling of a security the investor does not currently own in the expectation that its price will decrease, resulting in a profit. A hedge is a strategy used to reduce the risk of an investment by offsetting losses of the investment with profits from a separate investment. Leverage describes the use of borrowed funds to increase expected profits, and derivatives are financial instruments that derive their value from other assets, such as stocks, bonds, commodities, or currencies. Noise Financial news and other opinions can easily distract investors with noise, which can often lead them to making the wrong decisions. Investors should be wary of blindly following the advice of friends, family, or the media, as it may not be the best advice that will lead to achieving their financial goals. Many investors may fall prey to unwarranted hype about a certain company or stock, leading them to overestimate its potential rewards. To further protect consumers from making uninformed decisions, the Securities and Exchange Commission developed the “fair disclosure” rule. This rule requires that companies disclose all material information simultaneously to the public as soon as it becomes available, and prohibits them from selectively providing information to certain individuals. The use of reliable financial indicators, understanding the terms of modern finance, and avoiding the noise created by the media can all help investors make more informed decisions. Understanding the hoax of modern finance is a critical step in managing one’s finances and avoiding financial fraud.