How does Inflation affect Stock Market?
It is not necessary that Inflation affects stocks of every listed company in the stock market. It may affect stocks adversely or favorably depending on their fundamentals. If any company is having poor fundamentals then the stocks of that particular company will definitely suffer and on the contrary, the prices of stocks having rich fundamentals will go up.
Precautions to be taken by Investors when Inflation rises
Every Investor aims to achieve an attractive return on his investment. It may not be fulfilled due to higher inflation rate. Therefore we advise you to think both the rate of inflation and the rate of return before investment. The following example may help you understand what to do at the time of higher inflation rate.
Today, if we invest Rs.1000 in the market at 10% as a rate of return then we will have Rs.1100 at the end of the year. And if the rate of inflation is also at 10% then an item costing Rs.1000 today will also cost Rs.1100 after a year. Thus what we buy with today’s Rs.1000 we will be able to buy with Rs.1100 after one year. As a result, we will get nil returns on our investment after one year. Therefore, before investment we must consider that the rate of return should be higher than the rate of inflation.