Monday, 18 april 2022Stocks are one of the most preferred investment portfolios by investors. As an investment instrument, stocks promise high returns and high risks. That's why stocks are classified as high risk high return investments.
Investing in stocks requires accuracy and foresight in analyzing market movements. Wrong analysis can be wrong in making decisions so that you risk experiencing losses and even losing money invested in shares.
Every stock movement must always be monitored, because many factors influence it. One of them is inflation. The inflation rate, which is an increase in the price of goods and services in general, can reduce the purchasing power of each unit of currency.
Inflation Impact
High inflation has a harmful effect on economic stability, including threatening corporate finances. Rising inflation can lead to high input or raw material prices, decreased income and profits, low consumer purchasing power, and a slowing economy.
For companies, rising inflation can be good or bad. Inflation that is not too high will stimulate job growth. Companies can adjust production costs and increase the prices of goods and services, so that it will not have too much impact on the company's revenue generation and profit potential.
However, if the inflation is too high, the company should be worried. Because inflation that is too high is dangerous for the company's finances. Production costs will certainly increase dramatically, so companies must adjust the prices of goods and services.
Meanwhile, high inflation of course also erodes consumer purchasing power to be low. The value of money decreases, as a result, consumers can only afford to buy goods and services in smaller quantities. Low consumer purchasing power will affect the company's revenue and profit decline.
Influence on Stocks
Economic activity that continues to occur will lead to inflation, in which the general price of goods and services increases. Not always bad, because inflation is needed to maintain economic stability, of course, provided that the increase is not too high. The inflation rate that is generally targeted is between 2% to 3% per year. An increase in inflation that is more than that, could be harmful to the economy.
The economy runs depending on the market mechanism. But that does not mean that there are no policies implemented to keep the economy stable. When the threat of inflation increases, the central bank as the holder of the highest authority in taking monetary policy will try to control it by raising interest rates.
The increase in interest rates is expected to be a stimulus for investors so that they are encouraged to invest their cash in fixed income instruments, thereby sucking excess liquidity from the system. In theory, if liquidity is low or low, there will be speculative demand for economic goods, thereby slowing the general price increase.
The prospect of high interest rates for the stock market can encourage investors to shift their choices from equities to more attractive, lower-risk securities. The lower the flow of funds into the money market, the lower the demand for stocks.
This causes the stock price to decrease. If inflation continues to rise, then the minimum return on stock investment will also increase and push market valuations lower. Under these conditions, the stock price will fall to a point sufficient to offset the expected inflation.
And that is the impact of inflation on stocks that can hurt companies and their investors.
Playing stocks is not easy. Many factors will affect the performance of the portfolio so that it must always be anticipated in every decision making. As one of the factors that affect stock performance, inflation must be controlled by stock investors.
This means that investors must be able to protect the value of shares against inflation, along with the company's ability to generate income and profits at the same level as inflation.
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