Whenever you don’t invest and keep the savings in a bank account or pile cash, inflation bites off the value of these savings year after year. Investors have three major forces at their hands that allow fight inflation and increase the value of their savings further.
Interest
Fixed income instruments such as bonds make a significant part of an investment portfolio with moderate risks. Bonds are nothing but loans that governments and corporations take from those who purchase these bonds. Interest on these loans is the income that investor gets.
Dividends
Some stocks pay a small portion of their earnings to stockholders in the form of dividends. Investing in large established corporations’ stocks allows yielding more dividends.
Capital gains
Imagine you bought a car ten years ago. The value of this car will depreciate a lot over this time. On the other hand, the same class new car will cost more today as inflation pushes prices up year after year. Investors don’t buy cars. They purchase shares of the companies that produce them. Whenever the company grows and makes more profit from selling more new cars, the value of the shares increases, producing a capital gain.
Risk Warning: The information in this article is presented for general information and shall be treated as a marketing communication only. This analysis is not a recommendation to sell or buy any instrument. Investing in financial instruments involves a high degree of risk and may not be suitable for all investors. Trading in financial instruments can result in both an increase and a decrease in capital. Please refer to our Risk Disclosure available on our web site for further information.
