Investors in the first few years of trading likely experienced multiple heart attacks this week as the markets churned turbulently up and down. The Dow Jones Index [stock_quote symbol=”^DJI” show=”symbol”] was down nearly 1.5% early Wednesday afternoon, but somehow managed to close in the positive.
Blogs, chatrooms, and CNBC could all be found discussing the devaluation of Chinese currency and what it would do to the US economy. So what does devaluation mean exactly?
Put simply, devaluation is where China let’s their currency, the yuan, decline in value relative to the US dollar. While that may be good if your planning a trip to China soon, it typically is not a good sign for American companies.
Imagine if Walmart decided to cut their prices in half one day. What would happen? Everyone would go to Walmart for their groceries! China is doing the same thing.
By making the yuan worth less than the dollar, it is now cheaper to buy things (import) from China, and at the same time more expensive to sell to them (export).
This means companies in the US will have a harder time selling their products internationally, meaning they will earn less, make less profit, and decline in value.
On the flip side this means that a lot of the products that America purchases from China will likely come at a cheaper price, something no one is complaining about. So while some US companies and their stocks may suffer, American consumers may actually benefit from the devaluation.
The last thing to address is how China controls something like that. If you reading this your likely not happy with the power the Chinese government has here.
Your not alone in those regards. The Chinese government can control value of their money by stockpiling massive reserves of currency, giving them control over supply and conversely the value.
This particular devaluation occurred naturally, whereas past devaluations occurred with the help of the People’s Bank of China.
In the end the markets stabilized, with many investors realizing that the economy in the US today is much stronger than in the past, giving it the ability to roll with the punches. Many day traders took advantage of the turbulence and were able to make a lot of cash in the process.
Looking to learn more about how to begin investing? Try the Beginning Stock Trader learning center to begin your free tutorials.
