Almost everyone in a country pays attention to the Interest rates. But do you wonder how Interest rates effect stock market. In this article let us discuss some of the indirect links between interest rates and the stock market and how they might affect your life.
Interest rate is the cost of money, which – just like the cost of production, labor and other expenses – is a factor of a company’s profitability. When the interest rate is low, it’s easier to borrow money. In a very real sense, lowering this rate is like opening the faucet on a firehouse full of money. More money is available to borrow more cheaply. Economists suggests that this is a good way to stimulate a sluggish economy. The fundamental cost of money to an investor is the treasury note rate, whose return is guaranteed by the “full faith and credit” of the government.
When the interest rates are high, it’s more difficult to borrow money. Borrowing is more expensive; the flow of money dries up. Economics suggests that this is a good way to slow down an overheated economy.
- High Interest rates hurt company profits.
- Small companies hit most.
- High interest rates reduce domestic participation in stock markets.
- High Interest rates slow growth.