The volatile market and the inflationary times! What more is required to cause extreme annoyance to an investor? In this period of recessionary trends, inflation has turned out to be a decisive factor in share markets. The extent of rise in the inflationary trends will determine the future course of interest rates, which in turn will affect the share market performance.
Rising inflation is, as such, not bad for the share market, but the transition phase causes confusion in the minds of the investors. The starting point for an investor is critical. A slight error in the timing and the investor is likely to suffer heavy losses. If past trends are any indication, investors who entered the market subsequent to previous sharp declines, have reaped substantial profits over the following years. It is reasonable to assume that such an opportunity exists for long term investors from the recent rush for equity sell off.
Inflation initiates the chain reaction. When it surges, shares of companies suffer, but not all! Increase in the commodity prices pushes up the cost of materials and corporate profits are affected adversely. But some companies, who own high sales figures, find their golden opportunity, through the inflationary trends, when they have no competitors.
An investment strategy in inflationary times could be:
For an investor, well-versed in the art of investment, whether up trends, downtrends, inflationary times or depression in the market does not matter. The market is volatile under all these conditions, the differences are only in degrees. Those who have the capacity for risks, take more profits in inflationary times, if they are day traders. Such investors have up-to-date reports about the trends in the market, are seized of the issue of entry and exit times. But for a new investor, this is not a good time to make an entry in the market.
Be extra vigilant during this time. All the normal rules applicable to share trading hold good but with certain additional qualifications. Do not attempt to predict the market, but try to understand it. Be strict about the stop loss range that you have provided to the shares in your portfolio. Do not relax the self-imposed rules, succumbing to emotions. Make a thorough survey and research once again on all the shares at stake. Inflation works wonders in certain segments of the industry, and chance exists to make huge profits, provided you are able to spot such companies.
If you are doing online trading through which transactions take place fast, you need to be extra-cautious. During inflation, many factors affect share prices and this happens overnight. Issues like interest rates, high oil prices, GDP, change in the fiscal policies of Central Bank and the Government, have direct bearing on the market conditions. This is not the time to risk your entire capital on stocks.
Higher inflation leads to lower equity values. Interest rates rise. You get more money for the amount invested now. It is, therefore, logical to expect that for the amounts to be received in future, the value needs to be lower today. A higher return is possible if the share prices are lower or decline now. The aftermath of inflation like unemployment, varying interest and exchange rates-all these create uncertain conditions in the share market.
The prices of shares are directly related to the performance of any company. How the management of the company will take in its stride and function in the changed economic scenario is the main issue, which will have bearing on the share prices.
Inflationary times are testing for the share market. An investor develops mental blocks to invest in shares; he is unable to think freely and do normal trading. We have many more Investing Help Articles Now Available.