Part 2 of the Inflation vs Stock Market Reel is here. We analyse why the Stock Market is falling now even though people should be investing more to beat inflation!

Part 3 is dropping soon!

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LEARN ABOUT: Investing During Inflation

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Inflation is one of the key indicators of an economy’s health. High inflation leads to erosion in the purchasing power of money, which directly affects investors’ returns on their investments. One asset class that is affected significantly by high inflation is the stock market.

The stock market falls when inflation is high because high inflation rates lead to higher interest rates, which reduces the demand for stocks. Increased interest rates lead to a decrease in demand for stocks as investors opt for fixed-income securities, such as government bonds and fixed deposits.

This phenomenon occurs because high inflation causes investors to demand higher returns on their investments. When the interest rates offered for fixed-income securities rise, they become more attractive to investors, which diverts funds away from the stock market, leading to a decline in stock prices.

Another reason for the stock market’s fall during high inflation is that the companies listed on the stock exchange face an increase in input costs, such as raw materials, labor, and transportation costs, as a result of inflation. These higher costs lead to lower profits, which ultimately negatively affect the company’s stock prices.

However, investors should also note that while the stock market may be impacted during periods of high inflation, it is often a better hedge against inflation compared to fixed deposits. Over the long term, stocks have the potential to provide higher returns than fixed deposits.

FDs (fixed deposits) are relatively less volatile investments, and they tend to carry a lower risk than the stock market. However, during periods of high inflation, FDs may offer returns that are below the inflation rate, which could result in a loss of purchasing power. On the other hand, stocks have the potential to offer higher returns compared to inflation, although their performance may be volatile in the short term.

In conclusion, the stock market tends to fall during periods of high inflation due to increased interest rates and higher input costs that affect companies’ profits. However, investors should also consider the potential benefits of investing in the stock market during inflationary periods, as it may offer better returns in the long term compared to fixed-income securities such as FDs. Investors should carefully assess their risk tolerance and investment goals before deciding to invest in the stock market or fixed deposits.