BUSINESS

Reviewed by Gordon Scott

Risk management is the work of balancing opportunities for gains with the potential of making losses from your investing choices. This work can help reduce potential losses and increase potential gains. It can also help protect traders’ accounts from losing all of their money. The risk of losing money occurs when traders open positions. The larger the positions, the greater the risk, but also the greater opportunity for profit.

Risk management is an essential but often overlooked prerequisite to successful active trading. After all, a trader who has generated substantial profits can lose it all in just one or two bad trades without a proper risk management strategy. So how do you develop the best techniques to curb the risks of the market?

This article will discuss some simple strategies that can be used to protect your trading profits.

Key Takeaways

• Trading can be exciting and even profitable if you are able to stay focused, do due diligence, and keep emotions at bay.
• Still, the best traders need to incorporate risk management practices to prevent losses from getting out of control.
• Having a strategic and objective approach to cutting losses through stop orders, profit taking, and protective puts is a smart way to stay in the game.

Planning Your Trades

As Chinese military general Sun Tzu’s famously said: “Every battle is won before it is fought.” This phrase implies that planning and strategy—not the battles—win wars. Similarly, successful traders commonly quote the phrase: “Plan the trade and trade the plan.” Just like in war, planning ahead can often mean the difference between success and failure.

First, make sure your broker is right for frequent trading. Some brokers cater to customers who trade infrequently. They charge high commissions and don’t offer the right analytical tools for active traders.

Stop-loss (S/L) and take-profit (T/P) points represent two key ways in which traders can plan ahead when trading. Successful traders know what price they are willing to pay and at what price they are willing to sell. They can then measure the resulting returns against the probability of the stock hitting their goals. If the adjusted return is high enough, they execute the trade.

Conversely, unsuccessful traders often enter a trade without having any idea of the points at which they will sell at a profit or a loss. Like gamblers on a lucky—or unlucky—streak, emotions begin to take over and dictate their trades. Losses often provoke people to hold on and hope to make their money back, while profits can entice traders to imprudently hold on for even more gains.

Consider the One-Percent Rule

A lot of day traders follow what’s called the one-percent rule. Basically, this rule of thumb suggests that you should never put more than 1% of your capital or your trading account into a single trade. So if you have $10,000 in your trading account, your position in any given instrument shouldn’t be more than $100.

This strategy is common for traders who have accounts of less than $100,000—some even go as high as 2% if they can afford it. Many traders whose accounts have higher balances may choose to go with a lower percentage. That’s because as the size of your account increases, so too does the position. The best way to keep your losses in check is to keep the rule below 2%—any more and you’ll be risking a substantial amount of your trading account.

Setting Stop-Loss and Take-Profit Points

A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. This often happens when a trade does not pan out the way a trader hoped. The points are designed to prevent the “it will come back” mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible.

On the other hand, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade. This is when the additional upside is limited given the risks. For example, if a stock is approaching a key resistance level after a large move upward, traders may want to sell before a period of consolidation takes place.

How to More Effectively Set Stop-Loss Points

Setting stop-loss and take-profit points is often done using technical analysis, but fundamental analysis can also play a key role in timing. For example, if a trader is holding a stock ahead of earnings as excitement builds, they may want to sell before the news hits the market if expectations have become too high, regardless of whether the take-profit price has been hit.

Moving averages represent the most popular way to set these points, as they are easy to calculate and widely tracked by the market. Key moving averages include the 5-, 9-, 20-, 50-, 100- and 200-day averages. These are best set by applying them to a stock’s chart and determining whether the stock price has reacted to them in the past as either a support or resistance level.

Another great way to place stop-loss or take-profit levels is on support or resistance trend lines. These can be drawn by connecting previous highs or lows that occurred on significant, above-average volume. The key is determining levels at which the price reacts to the trend lines or moving averages and, of course, on high volume.

When setting these points, here are some key considerations:

• Use longer-term moving averages for more volatile stocks to reduce the chance that a meaningless price swing will trigger a stop-loss order to be executed.
• Adjust the moving averages to match target price ranges. For example, longer targets should use larger moving averages to reduce the number of signals generated.
• Stop losses should not be closer than 1.5 times the current high-to-low range (volatility), as it is likely to get executed without reason.
• Adjust the stop loss according to the market’s volatility. If the stock price isn’t moving too much, then the stop-loss points can be tightened.
• Use known fundamental events such as earnings releases, as key time periods to be in or out of a trade as volatility and uncertainty can rise.

Calculating Expected Return

Setting stop-loss and take-profit points are also necessary to calculate the expected return. The importance of this calculation cannot be overstated, as it forces traders to think through their trades and rationalize them. It also gives them a systematic way to compare various trades and select only the most profitable ones.

This can be calculated using the following formula:

[(Probability of Gain) x (Take Profit % Gain)] + [(Probability of Loss) x (Stop-Loss % Loss)]

The result of this calculation is an expected return for the active trader, who will then measure it against other opportunities to determine which stocks to trade. The probability of gain or loss can be calculated by using historical breakouts and breakdowns from the support or resistance levels—or for experienced traders, by making an educated guess.

Diversify and Hedge

Making sure you make the most of your trading means never putting all your eggs in one basket. If you put all your money into one idea, you’re setting yourself up for a big loss. Remember to diversify your investments—across both industry sector as well as market capitalization and geographic region. Not only does this help you manage your risk, but it also opens you up to more opportunities.

You may also find yourself needing to hedge your position. Consider a stock position when the results are due. You may consider taking the opposite position through options, which can help protect your position. When trading activity subsides, you can then unwind the hedge.

Downside Put Options

If you are approved for options trading, buying a downside put option, sometimes known as a protective put, can also be used as a hedge to stem losses from a trade that turns sour. A put option gives you the right, but not the obligation, to sell the underlying stock at a specified priced at or before the option expires. Therefore, if you own XYZ stock for $100 and buy the six-month $80 put for $1.00 per option in premium, then you will be effectively stopped out from any price drop below $79 ($80 strike minus the $1 premium paid).

What Is Active Trading?

Active trading means regularly attempting to take advantage of short-term price fluctuations. You’re not buying stocks for retirement. The goal is to hold them for a limited amount of time and try to profit from the trend. Active traders are named as such because are frequently in and out of the market.

What Are the Risk Management Techniques Used by Active Traders?

Techniques that active traders use to manage risk include finding the right broker, thinking before acting, setting stop-loss and take-profit points, spreading bets, diversifying, and hedging.

What Is the 1% Rule in Trading?

The 1% rule demands that traders never risk more than 1% of their total account value on a single trade. In a $10,000 account, that doesn’t mean you can only invest $100. It means you shouldn’t lose more than $100 on a single trade.

How Do I Become a Successful Active Trader?

To become a successful active trader you must understand financial markets and be familiar with the various tools used to read price movements. You must also have sufficient capital and time to trade and be capable of keeping your emotions in check. The key is having a strategy and sticking to it. And, if you want to be successful over the long term, spreading out your bets.

Active trading isn’t for everyone. Despite what you may hear, it isn’t easy and guaranteed to generate enough money for you to quit your day job. Think carefully, start small, and try simulating some trades on a test account before putting your money on the line.

The Bottom Line

Traders should always know when they plan to enter or exit a trade before they execute. By using stop losses effectively, a trader can minimize not only losses but also the number of times a trade is exited needlessly. In conclusion, make your battle plan ahead of time and keep a journal of your wins and losses.

Fact checked by Michael Logan
Reviewed by Somer Anderson

The stock markets famously display a sustained upward trend over the long term. But it’s the intermittent tailspins—like the 50% drop endured by most major markets during the 2008-09 global credit crisis—that test the fortitude of an investor.

The nimblest investors can make money no matter what is happening in the world. Trading the news should be an integral component of your investing strategy. While a day trader may trade the news constantly, a long-term investor might do so only occasionally.

Regardless of your investing horizon, learning to trade the news is an essential skill for astute portfolio management and long-term performance.

Key Takeaways

• Much of the news that moves the markets is scheduled, such as earnings reports and economic updates. Plot your strategy in advance rather than reacting on the fly.
• Most news events are good for one asset class and bad for others. Hedging your portfolio cushions losses.
• Avoid reacting to crowd sentiment. If you have confidence in your choices of investments, stick with them.

Classifying News

News can be broadly classified into two categories:

• Periodic or Recurring: This includes the scheduled releases of news that moves the markets, including interest rate announcements by the Federal Reserve, economic data releases, and quarterly earnings reports from companies.
• Unexpected or One-Time: These are bolts from the blue such as a terrorist attack, a sudden geopolitical flare-up, or the threat of debt default by an indebted nation. As a rule of thumb, unexpected news is more likely to be bad than good.

News can be specific to a particular stock or it can affect a sector, an industry, or the markets as a whole.

Trading the News

Here are a few examples of historical events and the actions that an investor could have taken in response.

A Federal Reserve Announcement

The Federal Open Market Committee’s (FOMC) interest rate announcements have always been among the biggest market-moving events, but its announcement in mid-March 2020 was of unusual interest, not least because it was issued on a Sunday.

In an effort to ease the economic effects of the 2020 coronavirus crisis, the Fed cut its main lending rate by 1%. It was the second cut of the month. It also announced plans to buy $700 billion in government securities.

The next day, the Dow Jones Industrial Average dropped 3,000 points for its worst day since the 1987 crash.

Many investors would have bet on a great day on Wall Street, and they would have been wrong. Other headlines dominated, including comments from President Donald Trump saying that the pandemic could last until August. (It turned out to be much worse.)

Nevertheless, investors who held on for just a few more weeks would have been amply rewarded when the markets started climbing again.

An investor in stocks who was looking to hedge potential downside risk could have done any of the following immediately after the Fed’s announcement:

• Trimmed positions in highly profitable equity positions to take some money off the table.
• Purchased puts either on specific stocks in the portfolio or on a broad market index like the S&P 500 or Nasdaq 100. Purchasing puts gives the investor the right to sell a stock for an agreed-upon price at a future time. If the security’s market price falls below the agreed-upon price, the investor gains by selling at the higher contractual price.
• Bought inverse exchange-traded funds (ETFs) to protect portfolio gains. These move in the opposite direction of the broad market or a specific sector.

While these reactive moves would typically be carried out after the Fed announcement, a proactive investor could implement the same steps in advance of a scheduled Fed statement.

This reactive or proactive approach to an important event or piece of news, of course, depends on the investor’s confidence in predicting the market’s near-term direction. An individual’s risk tolerance and trading approach (passive or active) also are factors.

A Jobs Report

In terms of economic data releases, few are more important than the U.S. jobs report because of its wider implications.

Traders and investors closely watch the employment level because it has a substantial impact on consumer confidence and spending, which accounts for 70% of the U.S. economy.

Job numbers that miss economists’ forecasts are generally interpreted as signs of incipient economic weakness, while payroll numbers that surge past forecasts are seen as a sign of strength.

In March 2021, the government announced that nonfarm payroll employment had increased by 916,000 the previous month, lowering the unemployment rate to 6%. About 210,000 new jobs were expected to be created. Crucially, many of the new jobs were in the travel industry, signaling a rebound in discretionary spending.

After a seesaw session, the Dow Jones Industrial Average closed up 171 points.

The investor playbook for trading jobs data is based on predictable market reactions.

• Payroll numbers below expectations: Suggests that the Fed will be forced to keep interest rates low for an extended time period. The impact on specific asset classes could be predicted in this table:

• Payroll numbers above expectations: Implies that the Fed may scale back the pace of asset purchases, which could send bond yields and market interest rates higher. The likely result:

An investor could use these market reactions to formulate an appropriate trading strategy to implement either in advance of the jobs report or after its release.

A Corporate Earnings Report

If you invest in individual stocks, it is advisable to have a trading strategy in place in advance of the relevant company earnings reports.

A stock’s price can soar or tank in minutes after releasing numbers that impress or disappoint. Imagine having a huge short position in a stock and watching it soar 40% in the after-market because its earnings were much better than expected.

Trading an earnings report is by no means required. If you’re in a stock for the long term, and you believe in its potential, you can ride out any quarterly storms.

But if you have a large position in a stock, long or short, you need to weigh the merits of leaving it unchanged over the earnings report or making changes just before the report comes out. Factors that should play a part in this decision include:

• The current state of the overall market (bullish or bearish);
• Investor sentiment for the sector to which the stock belongs;
• The current level of short interest in the stock;
• Earnings expectations (too high or comfortably low);
• Valuations for the stock;
• Its recent and medium-term price performance;
• The earnings and outlook reported by its competitors.

For example, an investor with a 15% position in a big-cap technology stock that is trading at multi-year highs may decide to trim positions in it ahead of the earnings report so that it constitutes only 10% of the portfolio.

An alternative option could be to buy puts to hedge downside risk. While this would enable the investor to leave the position unchanged at 15% of the portfolio, this hedging activity would incur a significant cost.

Key points to note: Avoid taking an unduly large position, and have a risk mitigation strategy in place to cap losses if the trade does not work out.

A Bolt from the Blue

Not surprisingly, the onset of the coronavirus pandemic in 2020 was a global event that threw stock exchanges around the world into a bear market from Feb. 20, 2020, until April 7, 2020.

Don’t worry if you don’t remember this. The stock markets then began a long upward trajectory and hit new record highs. The bull market that had begun after the 2007-2008 financial crisis resumed after a blip that lasted for less than two months.

This does not mean that bad news doesn’t matter. But it does suggest that the impulse to sell everything and take to the hills may be an overreaction. Over the years, the financial markets have demonstrated resilience.

During times of geopolitical uncertainty, it may be prudent to rotate out of more speculative stocks and into higher-quality investments. You might also consider hedging downside risk using options and inverse ETFs.

While you should scale back your stock exposure if it is uncomfortably high, bear in mind that in most cases, short-term corrections caused by unexpected geopolitical or macroeconomic events have proved to be the quintessential long-term buying opportunities.

Tips for New Traders

• Know the dates and times of important events: Information on the dates and times of key market events such as FOMC announcements, economic data releases, and earnings reports from key companies is readily available online.
• Have a strategy in place beforehand: Plot your trading strategy in advance so that you are not forced into making a rash decision in the heat of the moment. Know your exact trading entry and exit points before the action begins.
• Avoid kneejerk reactions: Make rational investment decisions based on your risk tolerance and investment objectives. This may require you to be a contrarian on occasion, but as successful long-term investors will attest, it’s the best approach for successful equity investing.
• Cap your risk levels: Avoid the temptation to make a fast buck by taking a concentrated long or short position. What if the trade goes against you?
• Have the courage of your convictions: Assuming you’ve done your homework, consider adding to an existing position if the stock plunges below its intrinsic value, or selling out to take profits in a stock that is wildly popular at the moment.
• See the big picture: Often, investor reaction to the news may not be as expected. You’d think an announcement of a dividend cut would lead to a sell-off in a stock. Sometimes, investors applaud the move as a signal that a company is investing more in its business.
• Don’t be swayed by market sentiment: Being overly swayed by market sentiment can tempt you to buy high—when euphoria runs rampant—and sell low. Many hapless investors were so spooked by the unrelenting tide of bad news in 2008 that they exited their equity positions near the lows, incurring massive losses in the process. They missed out on a stunning gain of 166% in the S&P 500 from March 2009 to October 2013.
• Know when to “fade” the news: Sometimes it is as important to ignore the news or “fade” it as it is to trade it. If you’re in it for the long term, you can ignore the noise.

What Are the Most Important Economic Indicators?

Investopedia identifies the 10 most important reports that an investor should keep an eye on to understand the big economic picture: quarterly gross domestic product; monthly employment; industrial production; consumer spending; inflation; home sales; home construction; construction spending; manufacturing demand, and retail sales.

Collectively, these reports can give you a good sense of the current state of U.S. business and its likely near-term direction.

What Is a Leading Indicator vs. a Lagging Indicator?

A leading indicator is an economic report that can be used to anticipate a trend. The new construction starts report indicates whether the home-building industry is betting on higher or lower sales in the short-term future.

A lagging indicator confirms a trend. The home sales report tells you whether home builders were correct in their assumptions.

Investors tend to pay more attention to leading indicators. They want to anticipate the news, not react to it.

What Is Market Sentiment and Should I Pay Attention to It?

Market sentiment is the mood of the market. In short, it’s the herd mentality. It’s best avoided unless you judge that the sentiment, upbeat or downbeat, has a sound basis in fact. Ignore it and you qualify as a contrarian.

The Bottom Line

Trading the news is crucial for positioning your portfolio to take advantage of market moves and boost your overall returns. But your trading decisions should be made in a thoughtful and measured way. Keep an eye on the news and watch for meaningful trends. Panic decisions are almost always a cause for regret.

Fact checked by Yarilet Perez
Reviewed by Robert C. Kelly

What Are Tariffs?

Tariffs are a type of trade barrier that makes imported products more expensive than domestic ones. Tariffs typically come in the form of taxes or duties levied on importers, and they’re eventually passed on to consumers. They’re commonly used in international trade as a protectionist measure.

For example, in February 2025, President Trump implemented a 25% tariff on imports from Canada and Mexico and a 10% tariff on imports from China. There’s also a 10% tariff on energy resources from Canada.

This article will examine how some countries react to a variety of factors that attempt to influence trade.

Key Takeaways

• Tariffs are a type of protectionist trade barrier that can come in several forms.
• Tariffs are paid by domestic consumers and not the exporting country, but they have the effect of raising the relative prices of imported products.
• Other trade barriers include quotas, licenses, and standardization, all seeking to make foreign goods more expensive or available in a limited supply.

Who Collects a Tariff?

In simplest terms, a tariff is a tax. It adds to the cost borne by consumers of imported goods and is one of several trade policies that a country can enact. Tariffs are paid to the customs authority of the country imposing the tariff.

Tariffs on imports coming into the United States, for example, are collected by Customs and Border Protection, acting on behalf of the Commerce Department. In the U.K., it’s HM Revenue & Customs (HMRC) that collects the money.

It is important to recognize that the taxes owed on imports are paid by domestic consumers and not imposed directly on the foreign country’s exports. The effect is nonetheless to make foreign products relatively more expensive for consumers, but if domestic manufacturers rely on imported components or other inputs in their production process, they will also pass the increased cost on to consumers.

Often, goods from abroad are cheaper because they offer cheaper capital or labor costs. If those goods become more expensive, then consumers will choose the relatively costlier domestic product.

Why Are Tariffs and Trade Barriers Used?

Tariffs are often created to protect infant industries and developing economies but are also used by more advanced economies with developed industries. Here are five of the top reasons tariffs are used.

Protecting Domestic Employment

The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs, which means higher unemployment and a less happy electorate.

The unemployment argument often shifts to domestic industries complaining about cheap foreign labor, and how poor working conditions and lack of regulation allow foreign companies to produce goods more cheaply. In economics, however, countries will continue to produce goods until they no longer have a comparative advantage (not to be confused with an absolute advantage).

Protecting Consumers

A government may levy a tariff on products that it feels could endanger its population. For example, a country may place a tariff on imported beef if it thinks that the goods could be tainted with a disease.

Infant Industries

The use of tariffs to protect infant industries can be seen by the Import Substitution Industrialization (ISI) strategy employed by many developing nations. The government of a developing economy will levy tariffs on imported goods in industries in which it wants to foster growth.

This increases the prices of imported goods and creates a domestic market for domestically produced goods while protecting those industries from being forced out by more competitive pricing. It decreases unemployment and allows developing countries to shift from agricultural products to finished goods.

Criticisms of this sort of protectionist strategy revolve around the cost of subsidizing the development of infant industries. If an industry develops without competition, it could wind up producing lower quality goods, and the subsidies required to keep the state-backed industry afloat could sap economic growth.

National Security

Barriers are also employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security. Defense industries are often viewed as vital to state interests, and often enjoy significant levels of protection.

For example, while both Western Europe and the United States are industrialized, both are very protective of defense-oriented companies. 

Retaliation

Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. For example, if France believes that the United States has allowed its wine producers to call its domestically produced sparkling wines “Champagne” (a name specific to the Champagne region of France) for too long, it may levy a tariff on imported goods from the United States.

If the U.S. agrees to crack down on the improper labeling, France is likely to stop its retaliation. Retaliation can also be employed if a trading partner goes against the government’s foreign policy objectives.

Common Types of Tariffs

There are several types of tariffs and barriers that a government can employ:

• Specific tariffs
• Ad valorem tariffs
• Licenses
• Import quotas
• Voluntary export restraints
• Local content requirements

Specific Tariffs

A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff can vary according to the type of goods imported. For example, a country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each computer imported.

Ad Valorem Tariffs

The phrase “ad valorem” is Latin for “according to value,” and this type of tariff is levied on a good based on a percentage of that good’s value. An example of an ad valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles.

The 15% is a price increase on the value of the automobile, so a $40,000 vehicle now costs $46,000 for Japanese consumers. This price increase protects domestic producers from being undercut but also keeps prices artificially high for Japanese car shoppers.

Non-Tariff Barriers to Trade

Licenses

A license is granted to a business by the government and allows the business to import a certain type of good into the country. For example, there could be a restriction on imported cheese, and licenses would be granted to certain companies, allowing them to act as importers. This creates a restriction on competition and increases prices for consumers.

Import Quotas

An import quota is a restriction placed on the amount of a particular good that can be imported. This sort of barrier is often associated with the issuance of licenses. For example, a country may place a quota on the volume of imported citrus fruit that is allowed.

Voluntary Export Restraints (VER)

This type of trade barrier is “voluntary” in that it is created by the exporting country rather than the importing one. A voluntary export restraint (VER) is usually levied at the behest of the importing country and could be accompanied by a reciprocal VER.

For example, Brazil could place a VER on the exportation of sugar to Canada, based on a request by Canada. Canada could then place a VER on the exportation of coal to Brazil. This increases the price of both coal and sugar but protects the domestic industries.

Local Content Requirement

Instead of placing a quota on the number of goods that can be imported, the government can require that a certain percentage of a good be made domestically. The restriction can be a percentage of the good itself or a percentage of the value of the good.

For example, a restriction on the import of computers might say that 25% of the pieces used to make the computer are made domestically, or can say that 15% of the value of the good must come from domestically produced components.

Who Benefits From Tariffs?

The benefits of tariffs are uneven. Because a tariff is a tax, the government will see increased revenue as imports enter the domestic market. Domestic industries also benefit from a reduction in competition, since import prices are artificially inflated.

Unfortunately for consumers—both individual consumers and businesses—higher import prices mean higher prices for goods. If the price of steel is inflated due to tariffs, individual consumers pay more for products using steel, and businesses pay more for steel that they use to make goods.

In short, tariffs and trade barriers tend to be pro-producer and anti-consumer.

Note

The U.S. has suspended tariffs on imports of steel and aluminum from the European Union. The suspension will last until Dec. 31, 2025.

The effect of tariffs and trade barriers on businesses, consumers, and the government shifts over time. In the short run, higher prices for goods can reduce consumption by individual consumers and by businesses. During this period, some businesses will profit, and the government will see an increase in revenue from duties.

In the long term, these businesses may see a decline in efficiency due to a lack of competition, and may also see a reduction in profits due to the emergence of substitutes for their products. For the government, the long-term effect of subsidies is an increase in the demand for public services, since increased prices, especially in foodstuffs, leave less disposable income.

How Do Tariffs Affect Prices?

Tariffs increase the prices of imported goods. Because of this, domestic producers are not forced to reduce their prices from increased competition, and domestic consumers are left paying higher prices as a result. Tariffs also reduce efficiencies by allowing companies that would not exist in a more competitive market to remain open.

The figure below illustrates the effects of world trade without the presence of a tariff. In the graph, DS means domestic supply and DD means domestic demand. The price of goods at home is found at price P, while the world price is found at P*.

At a lower price, domestic consumers will consume Qw worth of goods, but because the home country can only produce up to Qd, it must import Qw-Qd worth of goods.

When a tariff or other price-increasing policy is put in place, the effect is to increase prices and limit the volume of imports. In the figure below, price increases from the non-tariff P* to P’. Because the price has increased, more domestic companies are willing to produce the good, so Qd moves right. This also shifts Qw left. The overall effect is a reduction in imports, increased domestic production, and higher consumer prices.

What Are the Main Types of Trade Barriers?

The main types of trade barriers used by countries seeking a protectionist policy or as a form of retaliatory trade barriers are subsidies, standardization, tariffs, quotas, and licenses. Each of these either makes foreign goods more expensive in domestic markets or limits the supply of foreign goods in domestic markets.

What Is an Example of a Tariff?

An example of a tariff would be a tax on a good imported from another country. For example, a 3% tariff on corn would be a 3% tax added to the cost of corn paid by any domestic importer of corn from a foreign country. This would increase the cost of importing corn, resulting in an increase in the price of corn being sold domestically by the importer in order to cover the costs and earn a profit. This hurts domestic consumers as well as businesses, as consumers may look for cheaper competitors that are selling domestic corn and not the more expensive imported corn.

Do Tariffs Cause Inflation?

Theoretically, tariffs can cause inflation. Tariffs increase the price of goods and services in domestic markets by applying a tax on imported goods that is paid by the domestic importer. To cover the increased costs, the domestic importer then charges higher prices for the goods and services. Tariffs are typically applied to specific products or industries, so may not have a wide-scale effect, which, otherwise, would cause all prices to increase, resulting in inflation.

The Bottom Line

The role tariffs play in international trade has declined in modern times, though there are exceptions, like President Trump’s February 2025 tariffs on Mexico, Canada, and China.

One of the primary reasons for the overall decline is the introduction of international organizations designed to improve globalization and free trade, such as the World Trade Organization (WTO). Such organizations make it more difficult for a country to levy tariffs and taxes on imported goods, and can reduce the likelihood of retaliatory taxes. Because of this, countries have shifted to non-tariff barriers, such as quotas and export restraints.

Administration policies can impact the stock market in many ways

Reviewed by Charles Potters

Presidents get a lot of the blame and take a lot of the credit for stock market performance while in office. However, a president’s ability to impact the economy and markets is generally indirect and marginal.

Congress sets tax rates, passes spending bills, and writes laws regulating the economy. That said, there are some ways that the president can affect the economy and the market.

Key Takeaways

• Presidents have very little impact on the stock market, but they still seem to get some credit when performance is good and more of the blame if markets are down.
• Typically, Congress and the Federal Reserve play a bigger role in directly shaping markets when compared to the president.
• Fiscal spending legislation passed by Congress can influence market sentiment.
• The independent Federal Reserve can have a significant impact by raising (bearish) or lowering (bullish) interest rates.
• Bullish stock market sentiment can improve a president’s popularity, while a bearish stock market outlook can undermine a president’s standing.

How Presidents Impact the Stock Market

Because the president is responsible for implementing and enforcing laws, they have some control over business and market regulation. This control can be direct or through the president’s ability to appoint cabinet secretaries, such as the head of the Department of Commerce, as well as trade representatives.

The president also nominates the Chair of the Federal Reserve, who sets monetary policy along with the other Fed governors and members of the Federal Open Market Committee. The Fed is an independent government body with a mission to set monetary policy that ensures economic growth, low inflation, and low unemployment.

Those monetary policy measures can impact the stock market, although the Fed typically does not consider the performance of the stock market as an isolated factor to influence its decisions. The extent to which the person picked as Fed Chair is hawkish or dovish on monetary policy will determine how they affect the economy.

All presidents would like to lead during economic expansion and a rising stock market because those usually increase their likelihood of reelection. As President Bill Clinton’s campaign manager, James Carville, once famously said, “It’s the economy, stupid.”

This chart shows the S&P 500’s price change over each four-year presidential term going back to 1953. Two of the terms have two names because President Kennedy was assassinated before the end of his term, and President Nixon resigned before the end of his second term. Their terms were finished by their vice presidents, Lyndon Johnson and Gerald Ford, respectively.

CEO Presidents

There haven’t technically been any CEOs who went on to become president. In fact, Donald Trump may be the closest contender to claim that title. He was chair and president of The Trump Organization before becoming President of the United States. Many have tried, and we’ll likely see more attempts in the future.

Presidents and the NYSE

A sitting president will rarely visit the New York Stock Exchange. Sure, President George Washington’s statue is right across the street at Federal Hall, but the exchange was barely established during his tenure.

On Jan. 31, 2007, President George W. Bush visited the New York Stock Exchange. He had just made a speech on the economy across the street at the aforementioned Federal Hall, where he chastised corporations for excessive executive compensation. Little did he know, the nation was about to slip into a financial crisis and the longest recession it had experienced since the Great Depression.

S&P 500 Under Biden

Under President Biden, the S&P 500 had a choppy ride at first but made record gains in 2024.

Biden took office in January 2021 as markets were still rebounding from the losses suffered due to the COVID-19 pandemic. After initially topping out in January 2022, the S&P was buffeted by interest rate hikes as the Fed sought to restrain inflation. Rising interest rates caused the index to fall for most of 2022. Throughout 2023, the market showed increased volatility as market participants speculated on the size and timing of further Fed rate hikes.

After the Fed signaled an end to rate hikes, the S&P began to climb, breaking 5,000 for the first time in February 2024. It continued to rise steadily, peaking in July 2024 and then breaking through 6,000 in December.

Does It Matter Who Is President For Stock Market Performance?

No. History shows that neither party affiliation, nor who the incumbent is, has any direct effect on the performance of stocks.

Do Government Policies Have an Effect on Stock Market Performance?

Yes, government policies can have an effect on stock market performance, especially to the extent that they deliver large fiscal spending programs. Market investors view extra government spending as a boon to consumers and then to the market.

Do Tax Cuts Count As Fiscal Spending?

Tax cuts are a form of fiscal stimulus since they leave more money in consumers’ pockets, which drives personal spending and a generally bullish sentiment among investors.

Do the Policies of the Fed Impact the Performance of the Stock Market?

Yes. The Federal Reserve is an independent government body that sets monetary policy by raising or lowering interest rates, among its main tools. Higher interest rates, or speculation on them, generally have a bearish impact on stocks. The thinking is that higher rates will raise the cost of borrowing and act as a headwind to the overall economy. Lowering interest rates can have the opposite effect unless monetary policy easing is due to a weak economy.

The Bottom Line

While the president can influence the economy through policies and economic agendas that can impact the stock market, the president probably gets too much blame and too much credit when it goes down or up. That’s because larger macro events generally drive investment sentiment over the longer term.

A strong or bullish stock market, by raising consumer optimism, can redound the president’s popularity and may benefit the incumbent come election time. The same can be said if the stock market is down and investor sentiment is bearish, auguring poorly for the incumbent at voting time. So it could be said that stock market performance has a bigger influence on who is president, rather than the other way around.