Investment decision in the stock market ought to be judged carefully

Ahmed Showkat Masud At the time of high inflation, investors in the capital market will expect a higher return on their investment so that such return would be able to match the real rate of interest of the economy. If the inflation rate exceeds the yield on the security in which an investor invests hisher capital, then that investor will have to receive a negative real income. Our country's export earning is less than the expenditures on import of essential consumer items. Cost of imported fuel inflates the import bill further. We are talking here about balance of trade (BoT). That is negative in our case. Because, our cost of import exceeds the earnings from export. If we add invisible receipts with the figure of BoT, then we get the figure for balance of payments (BoP). Invisible receipts show a declining trend, caused by global economic slowdown. We know that in the era of globalization of the economies of different countries of the world, we will have to judge our country's economic situation from a global perspective. High inflation is a cause of concern for anyone belonging to the fixed income group and also for those who are dependent on the income earned on their invested capital. Depreciation of the real value of those among the fixed income group and owners of the capital, makes them vulnerable to the country's weird economic situation. Making investment of capital in stock market, keeping pace with, or outperforming that of the high inflationary pressure, is a matter of priority for many investors and portfolio managers. Investors do frequently become vulnerable to the odds of an economic situation exacerbated by high inflation. The absence of proper liquidity in the capital market makes the situation worse. Higher inflation and higher interest rates have a tendency to go hand in hand. That is why in the periods when the interest rates are high, the real rate of return, or we can say the yield on capital, can be much lower. If this is the situation, what can an investor do? Hedging can provide a solution to the loss of the value of capital invested in the stock market. It is a practice to protect one's invested capital against any downside risk. Downside risks may be in the form of the fall in stock prices or in the form of rise of the rate of inflation at a higher pace than usual. A common hedge against inflation is to purchase stock or shares, keeping pace with the rate of inflation over the longer term that can be indexed with the expected return or yield on purchased stock or shares. Any investor can hedge or evade the risk against hisher investment by interest-rate futures to get protection against movements of interest rates. Option is another kind of hedging. It is the right to buy or sell shares at a particular date with a particular price. Here the investor is not obliged to buy or sell at that particular price on a particular date for which the shares were bought or sold. Here the investor will buy or sell if it is profitable. That is, in option, we get two of its kind. One is option to buy and the other is option to sell the shares. Increase in the money supply directly leads to an increase in the price level, that is inflation, as indicated by the quantity theory of money. Under these circumstances, the government tries to adopt a stable policy. But, the investors in stock market will have to keep in mind that the price-fluctuations of stocks or shares are more related to the changes in the aggregate or macro economic scenario of the country and that ought to be judged from a global perspective. Because, the country's economy is suffering more from the external economic factors than domestic ones. Such external factors are really difficult to handle properly. The writer can be reached at email: ahmed.masud69@yahoo.com