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Simple English definitions for legal terms
indexation
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A quick definition of indexation:
Indexation: Indexation is a way of adjusting payments like wages, pensions, and insurance to keep up with inflation. It's like adding extra money to your allowance when the prices of things you want to buy go up. Indexation can also refer to investing money in a way that follows a group of stocks or securities.
A more thorough explanation:
Definition: Indexation is the process of adjusting payments, such as wages, pensions, or insurance, to account for inflation. It can also refer to investing funds to mirror a securities index.
Example 1: A retiree receives a pension of $1,000 per month. Over time, the cost of living increases due to inflation, making it more expensive to buy goods and services. To ensure the retiree's pension keeps up with the rising cost of living, the pension plan may use indexation to adjust the payments periodically.
Example 2: An investor wants to invest in the stock market but doesn't have the time or expertise to pick individual stocks. Instead, they choose to invest in an index fund that tracks a specific stock market index, such as the S&P 500. This way, the investor can benefit from the overall performance of the market without having to select individual stocks.
Both examples illustrate how indexation can be used to adjust payments or investments to account for changes in the economy. By using indexation, individuals can protect their purchasing power and potentially earn higher returns on their investments.