Why are equities the best way to fight inflation?

Equities are the best way to beat inflation.

You must think about how to beat inflation, and the answer lies in equities. Let's see how equities help you earn money by beating inflation. Equity is asset ownership in the finance world. For example, a company owns Rs. 1 cr worth of assets. The owner used Rs. 50 lakh of his own money and loaned Rs. 50 lakh from the bank to fund the purchases. The owner's equity will be considered Rs. 50 lakh. You become a partial owner of the business whose equity you buy. 

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How to Beat Inflation?

So what is inflation? Inflation is a price increase on a macroeconomic level that affects our money and finances. It not only eats our returns, but it also limits our spending ability. If your investment returns aren't ahead of inflation, you lose money. Currently, investment options like FDs (Fixed Deposits) get affected by high inflation as the inflation rate can be higher or even at par than these investments' return. Easily put, if you earn 5% through your investments and the cost of living increases by 7%, you lose money. Other fixed-income instruments, like savings accounts and government bonds, also sometimes offer returns lower than inflation. Investors must always look for investments that would beat the high inflation rate. A good investment strategy will help you say ahead. 

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Equities vs. Inflation

The Sensex has given a whopping 15% annual return in the past 30 years. It is because companies have grown at the same pace earning-wise. On the flip side, other fixed-income instruments like FDs only give you a 4-6% return. It seems foolish not to invest in the stock market and equities. However, one should invest in equities after considering certain factors such as financial goals, risk tolerance, and overall asset allocation. While equities may provide a higher return over the long term, they might not be the best option for the short term due to their volatility. 

Advantages of investing in Equities

The following are the advantages of investing in equities: 

1. Dividend and Capital Gains - A company's share price shows its profit growth over the long term. The price of the stock rises with rising profits. It is called capital gain. Some companies reward their shareholders for investing in them in the form of dividends through their profits. 
2. Liquidity - Some investments like real estate and gold are not liquid compared to equities, which you can sell on the exchange platform within seconds. 

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3. Control - You become a partial owner of a company when you buy its shares. You get the right to vote in some decisions. 
4. Bonus Shares - Companies give their existing shareholders bonus shares free of cost sometimes.  
5. Stock Split - Companies can split stock with an Rs. 10 face value into 10 shares of Rs. 1 face value, or Rs. 5 face value two shares. It reduces the stock price, but your holding value remains the same. However, you own more shares now. 

How to Invest in Equities Safely?

We have discussed inflation and stocks. Let's discuss how you can invest in stocks to fight inflation. Here's how to go about it: 

• Do your due diligence, like analysis and research, before you jump into the stock market. 
• Open a trading and Demat account for investing/trading.
• Analyze the P&L accounts, cash flow statements, and balance sheets of the companies you have invested in. 
• Always keep a diversified portfolio, as you never want to keep all your eggs in one basket. 
• Equities can have a lot of volatility in the short term, and you should be vary of it. Take advice from a financial advisor if you don't have enough knowledge. 

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Equities can help you stay ahead in the game by beating inflation levels. The Sensex has ensured that investors get higher returns in the long term, covering the inflation levels. You must consider investing in the stock market as it can not only give you higher returns but also provide you a cover against rising inflation. 

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.