The effect of inflation on stock prices Essay Example | Topics and Well Written Essays - 750 words

The effect of flash on stock prices - Essay Exampleinflation is dependent on the time horizons as it is subject to fluctuations everyplace shorter periods but more stable over a long term horizon (Sharpe Steven, 2000). In the global scenario some companies can react to inflation by raising their prices but this can be affected by the competition as others whitethorn not be subject to the same inflationary trends within their own insulated economies ((Little, Ken). Inflation results in the rise in prices of the stocks with no corresponding increase in value with the ultimate loss to the investors in that particular stock. Theoretically the stocks are a good hedge against inflation because a companys boodle and revenues usually grow at the same rate as inflation (Little, Ken). Some of the good inflation hedge instruments are gold, real estate and bullion market monetary resource. Different sectors in the stock market show variable response to inflationary trends. Fixed instruments like government securities and bonds tend to be batten down investments but yield very poor returns in the face of inflation as the purchasing power of the currency is greatly reduced and moreover the taxes on the gains accumulated over a period of time negate the interest earned over that span. Investments in stocks are therefore recommended to defeat inflation as it serves as an insulator against the devaluation of money as the companies are themselves more worried about the profitability of their assets and take adequate steps and means to tide over inflationary and other trends affecting stock markets.The art of preserving ones wealth during recession requires great insight into the market situation and switching funds between risky and safe investment instruments from time to time are the hallmarks of a good investor. The true stock market price after adjustment for inflation is the real indicator of the status of ones investments. If the stock market goes up at a better rat e than the inflation, the profits result depend upon the difference between the two