Definition
A store of value is a concept in economics that refers to an asset or commodity which maintains its value, rather than depreciating over time. It can be saved, retrieved, and exchanged in the future without losing its purchasing power. In simple terms, it’s a form of wealth that can be used in the future.
Phonetic
The phonetic pronunciation of “Store of Value” is /stɔːr ʌv ˈvæljuː/.
Key Takeaways
Main Takeaways about Store of Value:
- Definition: A store of value means an asset, commodity, or currency, retains its purchasing power into the future. The most common store of value in the modern world is currency, specifically currencies that are pegged to stable assets. Gold is another notable store of value.
- Protection against Inflation: Store of value plays a crucial role in economies by providing a medium to retain some value amidst inflation. This characteristic is essential to maintain the stability and confidence in the economy.
- Diversification: Different assets can serve as a store of value, providing individuals and institutions options for diversification. This includes tangible assets like gold and real estate, alongside financial assets like bonds and stocks. More recently, cryptocurrencies have also been recognized as stores of value.
Importance
The business/finance term “Store of Value” is important as it refers to an asset, commodity, or currency that can be saved, retrieved, and exchanged in the future without depreciating in value. This concept is crucial in economies as it promotes saving and investment, leading to economic growth. It ensures that goods and services purchased today will maintain their value in the future, thus providing financial security. In addition, it also forms one of the key functions of money, making it an integral part of the financial systems globally. Without a reliable store of value, economies may struggle with instability and unpredictability, affecting both individual finances and broader economic growth.
Explanation
A store of value is an essential concept in finance and economics, providing a fundamental measure of worth in an economic system. Its principle purpose lies in the retention of purchasing power over time. Essentially, it allows for the deferment of the consumption of purchasing power to a future date from the present. This function empowers individuals or entities to manage their wealth over an extended period, mitigate risks of volatile financial environments, and plan for future expenditures or investments effectively.Interestingly, a variety of items or assets can serve as a store of value. Classic examples include gold, real estate, and currencies such as the dollar or euro. The preserved value must not only remain but ideally, appreciate to act as an effective hedge against inflation. Recently, certain digital assets like cryptocurrencies are also recognised for their store-of-value capabilities due to their finite supply and growing acceptance. Whether tangible or digital, these assets provide a crucial function in maintaining economic stability and facilitating long-term financial planning.
Examples
1. Gold: This precious metal has been viewed as a reliable store of value for centuries across different cultures around the world. Gold’s value is more stable over time compared to volatile currencies or stocks, and is therefore considered a safe investment during times of economic uncertainty.2. Real Estate: Owning property is often seen as a reliable store of value. Assuming a well-chosen location, a house typically accrue value over time, and even during downturns, rarely drops to zero. Thus, real estate owners can expect to liquidate their assets for value equivalent to, if not more than, their initial investment.3. Savings Account: Money held in a savings account serves as a store of value because it allows individuals to keep their income in a place where it will retain its worth over time. It also earns interest, which can potentially increase its value over time, hence acting as a low risk store of value.
Frequently Asked Questions(FAQ)
What is Store of Value?
A store of value is an asset, commodity, or currency that can be saved, retrieved, and exchanged at a later time and it will be predictably useful when retrieved.
Why is Store of Value important in finance and business?
It is an essential feature of money or financial decisions as it allows individuals or entities to transfer purchasing power from the present to the future, indirectly supporting savings and investment.
Can you give examples of a Store of Value?
Yes, gold, real estate, and cryptocurrencies like Bitcoin are common examples of a store of value since they retain their worth over time.
Is every form of currency a Store of Value?
Ideally, currencies should serve as a store of value. However, in cases of hyperinflation or economic instability, a currency may fail to retain its purchasing power.
What is the difference between a Store of Value and a Medium of Exchange?
A medium of exchange is used in the trade of goods and services whereas a store of value means wealth or money can be saved and retrieved in the future with its value intact or potentially increased.
How does inflation impact the Store of Value?
High inflation can shrink the store of value as the purchasing power of an asset or currency becomes eroded. Through it, an asset valued at a certain price today may not have the same purchasing power in the future.
Is Store of Value related to investing?
Yes, when investing in certain assets such as stocks, bonds, or real estate, investors often look for assets that can act as a store of value. They aim to invest in assets that not only retain their value over time but also appreciate.
Related Finance Terms
- Asset
- Inflation
- Purchasing Power
- Gold (Precious Metals)
- Currency
Sources for More Information
