Nominal and Real Returns, Research Paper Example

Introduction

Nominal return refers to the money you get from an investment with no adjustment in inflation rate. However, nominal rate of return does not guarantee maximum profit from an investment. On the other hand, real return refers to the money an investor gets from investments after inflation rate had been adjusted. For example, if an investor receives a payback of 15% when there is inflation of 5%; real return will be 10%.

How inflation affects value of money on stock market

Inflation affects the value of money on wal-mart Inc stock market in many ways. Even if inflation comes with little effects, it can lead to loss in real merits of using money rather than trading. For instance, money has been for long time seen storage of value. For example when you sell a house for $1000, you can go ahead and se that money to purchase another house thus holding the value of money and you will have the desire to save it (Smither, 45-57).

Inflation has a negative impact on wal-mart stock market in that it weakens the role of money that is on stock market of Wal-Mart inc. when there is loss of value money continuously during inflation period, the number of those who borrow automatically reduces thus affecting stock exchange because there is more supply of money in public.

Inflation period drives people not willing to realize out there money. The assumption is that when loans are paid back, the money will have lost the buying price it had at the time when they were lending. The aftermath of this is that it hinders new business from being developed because many people need loans to start up businesses (Shiller, 53-71).

Money is the common means of exchange on stock markets since there is buying and selling of goods on daily basis. When inflation is high, money losses its role as an effective means of exchange thus affecting buying and selling rates of foreign exchange on stock market.

Pricing history of Wal-Mart Inc. stock market

Information below shows historical pricing of Wal-Mart Inc stock market for five years.

May 8^th 2006   $36.12

May 7^th 2007   $38.35

May 6^th 2008   $38.09

May 5^th 2009   $10.36

May 4^th 2010   $13.15

In order to get nominal return using Wal-Mart inc. stock market, the following is put in consideration:

Supposing you invested $2000 in 2006 in Wal-Mart Inc stock market, the nominal return will be:

$2000/36.12=$55.40 shares. With nominal value of $2000 if there brokering business was not allowed.

In 2010, nominal return on Wal-Mart Inc stock market will be; $55.40 shares* current price of $13.15= nominal total return of $728.510.

In order to get nominal rate of return, we look for percentage change. This will be: 728.510-2000/2000=0.64%, 0.64*100=64 % which is not too bad on our investment in the company.

Let us assume that rate is 2.5% per year. To get real rate of return will be; nominal rate of return-inflation. 64 %-( 2.5%*5 years) =64-12.5=51.5.

From the above, it can be said that the situation at Wal-Mart Inc stock market is not too bad. For instance, if you invested 15% nominal rate of return, the real rate of return after five years would be-5%. In such cases, it is safer to keep our money in financial institutions such as banks (Stein, 52-61).

Effects of interest rates on price of stock market

Interest rate is the money that you pay after using money of somebody that you borrowed in any financial institution. For instance, when federal reserves decides to increase its money rates it influences stock market but not immediately thus making it very expensive for banks to get money from Federal Reserve. In addition, this leads to increased discount rate that causes ripple effect hence affecting investors, financial institutions and other businesses. More so, increase of prices on stock market may lead banks to increase the interest rates they demand from their clients when they borrow money. If customers possess variable interest rate, then there is effect of decreasing money that customers spend. People need to spend for example, pay rent. This bill may hike leaving consumers at verge of less retention of income (Smither, 91-100).

When there is change in federal capital, individuals and their businesses are influenced even the price of stock market is also affected. To determine the price of stock market we take the total sum of future discounted cash flows and then divide it by total number of shares available on stock market. The price will not be constant, it will continue to vary due to distinct expectations that people hold towards that company and more importantly the Alcoa Inc stock company will be willing to trade its shares at different prices. The company’s future cash flow may come down if it cut on its spending or when profits it makes are low. Therefore, the prices of the company on stock market will drop (Stein, 71-88).

Conclusion

All in all it is important for an investor to read and understand the prices of shares on stock market before investing any money. More so, it is important to know the rate of inflation so as to know which time to invest your money in bank.

Works cited

Smither, Andrew. Wall Street revalued; imperfect markets and inept central bankers. New York: Wiley publishers, 2009.

Stein, Ben. Yes, you can be a successful income investor. Reaching for yield in Today’s markets. Pennsylvania: Pennsylvania University Press, 2006.

Shiller, Roberts. Irrational Exuberance: New York: Penguin Books, 2006.