Where Past Meets Present
To understand the difference between the ‘Old economy’ and the ‘New economy’, all you have to do is think about what shares your grandfather would invest in and contrast it with the shares you would invest in. As you’ve probably surmised, the so-called Old Economy stocks consist of major corporations. We’re talking about recognized brands with two feet on the ground and the characteristics of a battleship: Massive, stable but slow to change course. Many of these corporations have been in business since the industrial revolution and focus on manufacturing mostly tangible goods.
On the other hand, the new economy mostly consists of companies who exist in the cloud. In layman’s terms, the ‘Old Economy’ involves any share you would have invested in before the dot com era in the late 90s. The New Economy shares can usually be found at Tech conventions in Silicon Valley.
The old economy
For those of us who reminisce about the good old days when men would strike the iron with a hammer, cut open the earth to mine for coal while drilling massive oil rigs into the ground, that’s the Old Economy. This is because many old school investors simply don’t understand the value of tech shares, even more so after the dot com bubble burst.
The new economy
With the new economy, innovation is more highly emphasized than it is with old economy shares. This means that if a company is developing an app that can make someone’s day-to-day life easier, many investors will often give the green light, even if the demand for such a product hasn’t been well established. Additionally, investors will often flock to tech companies who haven’t even figured out a way to monetize their business. One classic example is SnapChat, a social network with a $28 Billion valuation and is yet to generate a single dollar in profits. Many old school economy investors wouldn’t even consider placing their capital into such a venture.
That’s because the old economy is more about physical production than they are about TED talks. If an oil driller could show his investors that the money it will cost to drill an oil rig is worth the returns they’ll get from the demand, it’s pretty much a done deal. In the new economy, investors will oftentimes consider the reach of the product. To many new economy investors, the idea of collecting data on those subscribing or using the product (user-data), is often just as valuable to them as cash itself. That’s because when a product like Snap-Chat does decide to monetize their service, the information of its users can be sold to third party advertisers. That’s what Facebook and Twitter ended up doing as soon as they went public as a means to justify their shareholder’s investment. This is a concept that many old economy investors are completely unfamiliar with.
While old economy shares like GM, Exxon Mobil and Caterpillar can be valuated based on their productivity costs vis-a-vis revenue, evaluating new economy shares like Snap-Chat, LinkedIn and Facebook isn’t so simple. Although both old economy and new economy shares seek to profit by exploiting demand, physical elements can adversely affect an old economy company’s productivity in ways that wouldn’t apply to tech shares. For example, bad weather can affect a sugar manufacturer if the crop is destroyed. An explosion at an oil rig can potentially send BP’s stock plummeting. A falsified emissions test could be very bad news for Volkswagen’s shares. New economy shares work a bit differently. These shares are more sensitive to reports regarding their growth and number of users or – alternatively – to new regarding a competitor with better technology. In some cases, the only thing that matters in a tech company is how the shares are performing – not how well the company is doing.
So, what is the conclusion? Know your share CFDs. Regardless of whether you choose to invest in new economy, old economy or diversify your portfolio with our over 470 tradable instruments, remember that information is a trader’s best friend. Take the time to learn about the instruments you invest in and understand the factors that could affect them.
Found this article interesting?
Want to see how quickly you can take your first steps in the world of online trading?
iFOREX has one of the most popular training packages.