If you have ever invested money in the stock market, or just side-glanced at it, you know that prices fluctuate massively. A stock can be worth €20 in the morning and €26 in the evening of the same day.
Now this €6 increase might not seem wild to you, but it is a 30% increase. When playing around with stocks worth €2,000 or more, a 30% increase is massive. Both in relative and absolute terms.
Price increases in the share market are driven by the age-old mechanism of supply and demand. If supply stays the same and demand goes up, so does the price for that stock, assuming everything else stays the same.
Now imagine this in a supermarket. What do you think would happen there if prices changed as frequently with demand as they do in the stock market?
Certainty versus risk
Would you still be willing to buy a jar of jam, knowing that as soon as you reach for the jar, the price of it may double?
And what about items that everyone needs, such as toilet paper? Would you be able to hold out on buying it, because demand has driven the price to an extreme €14.35 a roll?
You thought you knew what a kilo of sugar cost, but now you never do. Honestly, I personally would not be able to handle the uncertainty.
It would become impossible to manage a budget for groceries. A lot of people budget for their weekly essentials, and a lot of people simply have to do this if they have any chance of making it to the end of the month financially.
What would your options be, then? You would be forced to only buy the cheap(er) things, meaning those for which demand is low.
This would typically be the best option for people without much to spend, but it would get much worse if supermarket products rose and fell in price like stocks and shares.
They’d have to go into a supermarket and try to figure out what is cheap now, and hope this ends up being able to be incorporated into their lives, all the while wondering whether there might be a cheaper option tomorrow.
But as more and more people get the same idea, the price will quickly begin to rise and then rise again. You’d be back to square one. The hunt would continue.
Can you buy low and sell high?
There is the crux of the matter. In the stock-market you have arbitrage opportunities due to price changes: in straightforward terms, this means you can buy low, and sell high. It’s a good strategy, if you get it right, of course.
Introducing this into day-to-day life, such as getting your groceries in a supermarket, would prove profitable for some, but a nightmare for most.
People who had the resources, skill, intelligence or just time on their hands would be able to monitor the situation.
They might see patterns that allow them to predict when some products would be cheaper (coffee, for example, might be more expensive in the morning as demand for it is typically higher than in the evening).
Some products might be cheaper on some weekdays. Other products might just be subject to (seasonal) trends and come back in demand later in the year, if at all.
This kind of thing encourages speculation. And it can be incredibly risky, for both the consumer and the company to operate on such a system.
Price of retail uncertainty
Let’s analyse this from a supermarket’s perspective. If there were no actual minimum prices (which the supermarket needs to just maintain its electricity bills and employees), the supermarket might not actually be able to sustain itself long.
Luckily, because we are dealing with lots of different products in the supermarket, this risk would be spread out.
But here is another risk: competition. Smaller retailers would be able to resell cheaply obtained products for just under the current supermarket price.
As such, the supermarket price would fall lower due to a lack of demand, but this then again would bring the risk of not turning a profit. Hello arbitrage, goodbye supermarket.
As much as I enjoy the stock market, personally, I am much happier knowing how much my tea, vegetables and toilet paper costs. I don’t even mind the supermarket turning a profit on it, as long as it’s there, and hasn’t gone bankrupt due to extreme price fluctuations.
So what does this all mean for you?
1. If you are on a budget, make sure to regularly update the products you buy. Although product prices tend to be more stable than stock prices, they do fluctuate. And you might miss out on a better deal!
2. Similarly, don’t just stick with one store.
Some retailers might be cheap in one product category, but not in another. Do shop around to find the best deals. There is usually an arbitrage opportunity if you look closely.
3. Don’t be scared off by low prices or low demand.
Just because something is cheap or unwanted does not mean it is bad. An example might be “ugly” fruit and vegetables. Just because they look a bit beaten up doesn’t mean they are no longer tasty or nutritious.
4. Investing in the stock market can be a great idea.
However, don’t choose the same stocks everyone and her mother is investing in, because this has driven up the price (supply and demand). When demand falls again, so will the price!
5. Not everyone has the time or desire to uncover the many mysteries of the stock market.
But what you can do is seek out help from a financial adviser. You might manage your money best with help from a professional who knows what they are doing.
Merle van den Akker also blogs at www.moneyonthemind.org. She is studying for her Ph.D in Business and Management, specialising in behavioural science, at Warwick Business School, UK.