Deflation occurs when the amount of currency in circulation is reduced and currency increases in its buying power. In short, the purchasing power of money increases. The inverse of inflation, under deflation it takes less money to buy the same amount of goods and services. Deflation may help consumers in terms of short-term affordability of goods and services in the market, but it has historically had an adverse macroeconomic impact on stock markets.

Historically, deflation is rare. In the United States, deflation of the s led to the Great Depression and did not end until the country entered World War II.

What does deflation mean to investors?

Japan also had a long deflationary period starting in the s and continuing into the 21st century. In both instances, stock market values were devastated. In a deflationary economy, instead of reveling in bargains, consumers may become afraid to invest in depreciating products and services.

They also anticipate prices falling even further, an additional incentive to delay purchases. Commodities are generally a hedge against inflation, not deflation. When deflation occurs the value of cash rises. As a result, investment value in commodities such as precious metals -- historical safe-havens during an inflationary economy -- tends to decrease.

The general principal reflected in the commodity markets is that value becomes a reflection of the depreciating value of the underlying product or service. In a deflationary economy, companies may have to reduce prices for products and services.

As a result, reduced profits may make loans that were perfectly good when originally made perfectly foolish. This is due to price and profit decreases for goods and services as well as the reduced value of collateral pledged for outstanding debt. Prices can fall to levels where companies, including publicly- traded ones, become australian super best investment options and cannot afford to stay in business.

The demand for lending by investors and banks is reduced in a deflationary economy.

How to Invest During Deflation - Value Stock Guide

Publicly-traded companies' assess to funding for worthwhile projects also tends to fall. Finance for innovation will suffer absent some type of purposeful actions to increase money circulation, such as through central bank actions related to the money supply and interest rates -- policies that are not always successful in reducing deflationary pressures.

Vanessa Cross has practiced law in Tennessee and lectured as an adjunct professor on law and business by earn email money reading in india. She has also contributed as a business writer to news publications, including the "Chicago Tribune," and forex data feed providers in peer-reviewed academic journals.

Cross holds a B. Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system.

These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm. Visit performance for information about the performance numbers displayed above. Skip to main content. Does the National Trade Deficit Have an Impact on the Stock Market?

Neural Network Analysis Methods for the Stock Market How Do the Prices Change in the Stock Market? Consumer Spending Historically, deflation is rare.

Commodity Markets Commodities are generally a hedge against inflation, not deflation.

How Inflation Affects Stock Investments

Companies Binary option trading advice 90 a deflationary economy, companies may have to reduce prices for products and services.

Financial Markets The does deflation affect stock market for lending by investors and banks is reduced in a deflationary economy.

References 3 The New York Times: For Stock-Market Players, All Deflation Is Not Equal: One Investor's Delight May Be Another's Nightmare Financial Markets and Financial Crises: The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison Seeking Alpha: Deflation Is a Long Term Threat for the Stock Market.

About the Author Vanessa Cross has practiced law in Tennessee and lectured as an adjunct professor on law and business topics. Recommended Articles What Does PPS Mean in the Stock Price? The Buying Power of Gold Over Time The Average Annual Rate of Inflation for Retirement Planning Why Is a Debit Card Issuing Cash When the Withdrawal Causes the Account to Be Overdrawn? Money Sense E-newsletter Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more.

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