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How Do Tariffs Affect Stocks?

By September 3, 2019 No Comments

You’ve probably heard a lot of talk in the news recently regarding tariffs. That’s because the current administration has been imposing tariffs on a wide variety of imported goods, specifically those from China, with the goal of encouraging manufacturers to make more products in the United States.

If you’re new to day trading and aren’t sure how it all works, you may have yet to encounter any impacts tariffs can have on the stock market. If you’re a seasoned trader, you’ve probably seen this before. Either way, it’s important to have a firm grasp on what tariffs are, how tariffs work, and how day traders can benefit or be hindered by tariffs.

What Are Tariffs?

Tariffs are special taxes that are imposed when imported goods cross a border. They can be placed on any type of product, from food to clothing to electronics and beyond. Basically, any country can place tariffs on any goods or services from any other country at any time.

Why do tariffs exist? By making it more expensive for people to get a product from another country, the government imposes tariffs in the hopes that it will encourage people to buy the domestic version of that product instead. This both increases government revenue and, in theory, boosts the economy.

For example, let’s say that the United States government places a tariff on Japanese-made cameras in the hopes of increasing camera production in the U.S.. The intent is that the increased cost will lead consumers to choose a cheaper American-made camera in favor of the more expensive Japanese version.

There are two types of tariffs: ad valorem and specific.

Ad valorem tariffs are based on a percentage of the good or service’s value. If the price of the product changes, the tariff will change proportionally with it.

Specific tariffs aren’t based on the value of the good or service in question. Instead, they are a fixed amount that gets charged regardless of any fluctuations in the price of the product.

How Do Tariffs Affect Consumers?

If you’ve heard about the recent tariffs and thought, “Phew, glad that doesn’t apply to me,” this section is for you.

Just because tariffs aren’t always placed on something you purchase directly, doesn’t mean they don’t affect you. For instance, you may think a tariff on copper won’t affect you because you don’t typically go out and buy a bunch of copper, but you’d be wrong.

Copper is used in a lot of things, including most major appliances and in many car parts. Need a new dishwasher? The cost of copper affects you. Does your car’s radiator need to be replaced? Expensive copper will impact your wallet here, too.

And that’s where we get to the potential issues with tariffs. Sure, they can impact the economy positively, but they can also have a negative impact.

The cost of a tariff ultimately gets passed on to the consumer. The reasoning behind this is that it will encourage consumers to purchase American-made products instead; but what if there aren’t any? Let’s look at TV’s for example.

Did you know there are no televisions made in the United States? That means if the government puts a tariff on every country that imports TVs to the U.S., you’re going to eat that cost. Without an American-made TV to choose instead, your options are to pay the extra money or go without a TV. Since most Americans would rather not go without a television, this tactic meant to stimulate the economy is actually hurting it. Spending more money on televisions means consumers have less money to spend elsewhere.

Additionally, when we impose tariffs on other countries, we risk them doing the same in return. Not only can this harm trade, but it can also harm the relationship between the companies involved.

How Do Tariffs Affect Day Trading?

Whether tariffs affect day traders depends almost entirely on what the tariff is on and the companies the trader invests in.

Going back to our copper example: If you invest in a company that makes dishwashers and the price of copper goes up, you may see a drop in the stock. More expensive copper means the potential for fewer sales and lower profits for the manufacturer.

For day traders, tariffs can take an already volatile market and make it more volatile. Some day traders may use news and tariff updates to trade on but, having been in the industry for many years, we can promise you that trading based on current events is not wise.

At Day Trader Architects, our strategies aren’t based on the highs and lows of any stock or company. Instead, we teach our students to trade using a combination of visual patterns and a very specific set of rules.

For example, let’s discuss our stop-loss rule. We help traders stick to a trading plan that’s designed to cover every eventuality. This plan includes a list of execution rules; of which, one of the most important is our stop-loss rule. No matter what happens or what variables may affect the trade, the stop-loss rule is there to protect the trader. Without this, a trader can experience a lot of many inconsistencies and, as a result, great loss.

Once our traders learn this and the many other rules we teach, they will begin to see results. When consistency is combined with patience, successful executions are not far away. All it takes is a little time and one of our custom-built trading courses. We’re here, we’re ready, and we want to get you trading right away.