In our article on inflation, you have learned that even if you do nothing else with your money than keeping it under your mattress, its value will decrease over time because of rising prices (inflation).
On the other hand, if you deposit your money on a bank account or if you invest it, its value is also subject to a number of different influences. These influences are not only extremely varied, many of them are interrelated and influence each other.
Can you imagine that even a natural phenomenon can have an impact on your investment? If you think this is a joke, you’ll be surprised.
The way the value of an investment is established is often complex. But if you always keep some simple basic principles in mind and use common sense, you are likely to identify and understand most of the factors that may have an impact on the value / price of your asset.
First, be aware that the value of your asset – be it gold, real estate, securities or noble wines – is nothing other than the price others are ready to pay to acquire it. The value of your investment will therefore depend on all the events that have an impact on the price of the asset you have invested in.
With few exceptions, prices follow the law of supply and demand.
Goods that are available only in limited quantities and that many people want to have are expensive, because those who offer may charge higher prices and will still find consumers who are willing to pay these high prices.
On the other hand, goods that exist in abundance and that few people want to have are of very little or no value at all. That’s why you will not make a fortune when trying to sell ice cubes at the North Pole or sand in the Sahara. However, selling ice cubes in an oasis in the middle of the desert would be a much more promising business model.