Understand the impact of inflation on stock returns from "summary" of Stock Investing For Dummies by Paul Mladjenovic
Inflation is a phenomenon that most people are familiar with. It refers to the general increase in prices of goods and services over time. When inflation occurs, the purchasing power of money decreases, meaning that you can buy less with the same amount of money. This can have a significant impact on your investments, particularly in the stock market.
Stock returns are often affected by inflation. When prices rise, the value of stocks can be eroded. For example, if you own a stock that is currently valued at $100 and inflation causes prices to increase by 3%, that stock would need to be worth $103 just to maintain its real value. If the stock does not keep up with inflation, its real value decreases.
It is important for investors to understand the impact of inflation on stock returns because failing to consider inflation can lead to lower real returns on investments. In other words, even if your stocks are performing well in nominal terms, if they are not outpacing inflation, you may not be actually making a prof...
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