Definition

Inflation refers to the sustained increase in the general price level of goods and services within an economy over a specific period of time.

What is inflation

In simpler terms, it means that over time, the cost of goods and services tends to rise, causing the purchasing power of money to decrease. This rise is commonly measured using the inflation rate, which indicates the percentage increase in prices over a given period, usually a year.

Inflation can have a significant impact on various aspects of an economy and personal finances. Here’s how it works and its effects:

1. Causes of inflation: Inflation can be caused by several factors, including increased demand for goods and services, rising production costs (such as wages and raw materials), and changes in the supply of money within the economy. Central banks play a role in managing inflation by adjusting interest rates and implementing monetary policies.

2. Effects on purchasing power: As prices rise, the purchasing power of money diminishes. This means that the same amount of money will buy fewer goods and services than it could in the past. Individuals and households might find that their savings and incomes don’t stretch as far, impacting their ability to afford necessities and discretionary expenses.

3. Impact on investments: Inflation can affect investments and savings. Assets that don’t keep pace with inflation can lose value in real terms. For instance, if your investments earn a lower return than the inflation rate, your purchasing power could erode over time.

4. Wage inflation: Rising prices often lead to demands for higher wages to maintain the same standard of living. If wages rise faster than productivity, it can contribute to overall inflationary pressures.

5. Uncertainty: High or unpredictable inflation can create economic uncertainty. Businesses may struggle to plan for the future, and consumers might delay spending if they expect prices to continue rising.

6. Interest rates: Central banks often adjust interest rates to manage inflation. Higher interest rates can help reduce borrowing and spending, which can slow down inflation. Conversely, lower interest rates can stimulate borrowing and spending, potentially increasing inflation.

7. Savers and borrowers: Inflation can have varying effects on different groups. Savers might see the real value of their savings decline, while borrowers with fixed-rate loans could benefit if inflation erodes the real value of their debt.

8. International trade: Inflation can impact a country’s competitiveness in international trade. If a country’s inflation rate is much higher than that of its trading partners, its exports might become less attractive due to higher costs.

Example of inflation

Let’s consider a short example of inflation and how it affects the prices of goods and services:

In year 1, the price of a standard basket of goods and services, which includes items like food, clothing, and housing, is R100.

Due to various economic factors, including increased demand, production costs, and monetary policies, the inflation rate for the economy is 5%.

In year 2, with a 5% inflation rate, the prices of goods and services increase. The new price of the same basket of goods and services is calculated as follows:

New price = Initial price x (1 = inflation rate)

New price = R100 x (1 + 0.05) = R105

As a result of inflation, consumers need to spend R105 to purchase the same basket of goods and services that cost R100 in the previous year.

If you want to find out how inflation affects you, try our inflation calculator today.

Definition

An IPO, or initial public offering, is a significant financial event that marks the first time a private company offers its shares to the public on a stock exchange.

What is an initial public offering?

This process allows the company to raise capital by selling ownership stakes (shares) to individual and institutional investors. In return, investors become shareholders in the company and have the potential to benefit from its growth and success.

Here’s an overview of the IPO process and its key points:

1. Going public: When a company decides to go public through an IPO, it typically means that it has reached a stage of growth where it requires additional capital to fund its expansion, research, development, or other business activities. Going public also provides the company’s founders and early investors an opportunity to cash out some of their investments.

2. Preparation: Before launching an IPO, the company needs to go through a thorough preparation process. This involves working with investment banks, lawyers, and financial experts to assess the company’s financials, valuation, market positioning, and regulatory compliance.

3. Pricing and valuation: The company, along with its underwriting investment banks, determines the initial price at which its shares will be offered to the public. This price is often based on factors such as the company’s financial performance, industry trends, and market demand.

4. Roadshow: Prior to the IPO, the company may engage in a roadshow, which involves presentations to potential investors to generate interest and educate them about the company’s business model, growth prospects, and financials.

5. Stock exchange listing: Once the IPO shares are priced and allocated to investors, the company’s shares are listed on a stock exchange. This allows investors to buy and sell shares of the company’s stock in the secondary market.

6. Liquidity and capital: Going public provides the company with access to a broader pool of investors and potential sources of capital. It also offers liquidity to early investors and employees who hold shares, as they can now sell their shares on the public market.

7. Ongoing reporting: As a publicly traded company, the company is subject to regulatory requirements, including regular financial reporting and disclosure of material events. This level of transparency is designed to provide investors with accurate and up-to-date information about the company’s performance and outlook.

8. Market perception: The success of an IPO can also influence the market perception of the company. A strong debut and positive post-IPO performance can enhance the company’s reputation and potentially attract more investors.

IPOs can be complex undertakings that involve financial, legal, and strategic considerations. For investors, participating in an IPO can offer the opportunity to invest in a company at an early stage of its public journey, potentially benefiting from its growth over time.

Example of initial public offering

YZ Tech Inc., a successful technology startup, has been operating as a private company, raising funds from venture capital and private investors. They decide to go public to raise additional capital for expansion, research and development, and to provide liquidity for existing shareholders.

Based on investor interest and market conditions, the offering price for XYZ Tech Inc.’s shares is determined. The underwriters allocate shares to institutional investors and individual investors.

On the day of the IPO, the company’s shares are officially available for trading on the stock exchange. The opening price is often different from the offering price, depending on market demand.

XYZ Tech Inc. successfully raises capital through the sale of its shares in the IPO. The funds raised can be used for various purposes, such as expansion, acquisitions, or debt repayment.