The inflation is causing our money to lose its purchasing power. To protect against this, we can invest our capital into non-money values. However, speculations on the stock market are risky as well, and the markets likes to become especially volatile during crises and uncertain times. Is online trading advisable to protect your capital from the inflation, and if so, what should you consider?
Times of High Inflation Rates
The inflation causes prices to rise and the number of things we can buy for our money to drop. A dollar today might only buy us items worth 75 cents next week.
That’s why experts advise us to take our money now and turn it into items that are not affected by the inflation. When we need access to the money, we can sell these assets, either for a higher value or at least for the same worth, in comparison to the money we could have kept instead.
However, large investments like real estate aren’t readily available to anybody. Alternative investments that aren’t directly or negatively influenced by the inflation can be found when we use online brokers for traders.
The Impact of the Inflation on the Stock Market
Historically, periods of high inflation rates lead to more volatile markets. Many studies have tried to find correlations between the inflation rate and the resulting market movements in the past, with inconclusive and sometimes opposing results.
- Fact is, there is no overarching ruleabout how assets on the stock market react to high inflation rates. Some asset types develop differently than others.
That’s why when the inflation rises, investors must analyze every one of their assets separately. When we are looking for assets to protect us from inflation, we need to put in a good amount of research first. Successful traders, like Andre Witzel, often share their knowledge online to help you make informed investments.
The trickiest phase is the beginning of a high inflation period. Shortsighted and panicky investment decisions lead to falling values and shifts. However, many corporations quickly adapt to the current inflation and adjust their prices, returning to their regular rate of return.
Types of Investments to Beat the Inflation
Not every asset we can buy on the stock market is suitable to protect us from the influence of the inflation. During times of financial crises, assets like stocks typically plummet in value. When society is strained and things seem unstable, many people would rather not invest their money in virtual assets that could lead to total losses.
However, some other assets and trading strategies can help us increase our capital. Some of them can even help us profit from falling market values.
Value stocks are stocks from successful companies that have existed for a long time and gained continuous revenue over time. While the gain we can get from investing in value stocks is less spectacular when we are thinking short term, owing this kind of stock is beneficial in the long run.
During the inflation, the purchasing price of a value stock is lower than their usual, intrinsic value. Over time, especially when the company rises their prices and adjusts their income to the inflation rate, we can slowly but surely profit from the return to normalcy.
Commodities, like gold, are typical inflation protection. While currencies and other virtual assets can decrease in value, the commodities always have an intrinsic, material value. That’s why investing in these types of items will never be a total loss.
- Exchange traded funds (ETFs)that offer a larger portfolio of commodity stocks are a promising option during inflation.
- The same applies to real estate investment trusts (REITs).Here, the REIT pays dividends created by a pool of cash-generating real estate we are investing in when we own this type of asset. Since the income sourced from real estate is traditionally resistant to the decrease in value caused by inflation, REITs offer us stable returns and less volatility than the traditional stock market.
When we are trading with derivates, we don’t buy a stock, but speculate on an asset that copies a stock’s market movements as its base value.
Through binary trading, we can profit from rising or falling market values. When we open a position of this kind, we can determine whether we expect the base value to in- or decrease until a set date. Did we expect it to fall, and it did fall, our speculation was successful, and we gain profits.
Short selling is a very risky investment method, as we have learned from the famous GameStop surge in 2021.
Here, we expect the value of a stock to fall. We ‘borrow’ a stock from a financial institution and promise to give it back to them at a later time. We can sell this asset and invest the money otherwise. When the time comes to return the stock to the lender, we can buy it for a cheaper value than the amount we have gained when we borrowed it.
However, when our speculation fails, and we have borrowed many stocks we were hoping to buy for cheaper prices in the future, we will now need to pay more money if the value has risen in the meantime instead.
Stock market assets can be a great protection from high inflation rates. While our money loses its purchasing power, investments can keep their values or even increase in worth over time. This way, the money that would have lost its purchasing power if we kept it, is securely locked away in our investments, and can even help us profit in the future.
To make good investment decisions, we should analyze the specific assets that interest us individually and develop a diverse portfolio, to protect us from a total loss if one asset fails.