Explained in simple non-financial terms how inflation affects the stock market. Enjoy!

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What is inflation?
Inflation is the rise in the price of goods and services we use, reducing the consumer's purchasing power or what a consumer can buy with each currency unit.

How inflation affects the stock market?

1. Rise in raw material price
A shirt manufacturing company needs cotton as raw material. With the rise in inflation, the price of raw materials, i.e. cotton, in this case, increases. This shrinks the profits of the company, which then reflects in its stock price.

2. Transfer of increase in raw material to end customer takes several quarters
You must be wondering why a company takes so much time to transfer the increased cost to the end consumer. The company is manufacturing its product daily and needs raw material for it. Raw material or commodity prices fluctuate throughout the year, and the company cannot reduce or raise the price of its products every other day.

3. Relation between interest rates and inflation
An increase in inflation forces governments to increase interest rates, making borrowing money expensive, making it difficult for businesses, especially growth companies, to borrow money. This affects the expansion plans of companies and makes it difficult to fund the operational costs.

4. Increased product prices lead to reduced consumers
Companies will slowly increase the price of their products or services to counter the increase in raw material and labour costs. This increase in the product’s price can lead to fewer buyers willing to spend the increased amount. It will further lead to loss of revenue and hence profits for the company, which will reflect in its stock price.

5. Liquidity in the market and inflation
Another tool government uses to control inflation is to reduce the money out in circulation. Reduced money supply means less money is now available to the investors, consumers and companies, hence curbing inflation and bringing the stock market down.

6. Relation between inflation and job creation
All these factors mentioned above make companies conservative about their expansion plans and hence negatively affecting the job market. As a result, companies avoid hiring people, making the situation even worse. As unemployment increases, the number of potential consumers reduces, affecting companies' bottom line and forcing companies not to raise wages or hire new people. This again leads to a drop in the stock market.

How can we position ourselves as investors during high inflation periods?

- Bargains or investing opportunities in dividend-yielding stocks.
- Due to increasing interest rates, government bonds become attractive because of their safety or less risk with good returns.
- Investing in companies that control costs, e.g., utility companies, is rewarding.
- Value companies perform better than growth companies.
- Lastly, investing in commodities or companies producing commodities gives better returns.

Long term investment and growth opportunities:
How to be a Millionaire: [ Ссылка ]
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Principles to Create a Portfolio: [ Ссылка ]

Money Trap and Investing Mistakes:
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Money Trap that Keeps you POOR: [ Ссылка ]

DISCLAIMER:
I am not a financial or tax or real estate advisor. My videos are for educational purposes only and merely cite my own personal opinions. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial or tax or real estate advisor if necessary. Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing. Always remember to make smart decisions and do your own research!

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