Pro Trade Report

Despite recent years (until 2010) is a period of low interest rates in the world, people are generally unaware of how these rates affect the stock markets. For them, they think that any change in official rates will affect the amount that the bank will give them each year for their savings or how much more or less they can spend on their credit cards. However, interest rates have a much broader financial markets

The most important factor in the modern economy is the interest rate. In the United Kingdom, the base rate is set by the Bank of England at noon on the first Thursday of each month. The figure quoted is saying to banks and large companies how they can borrow money, which in turn tells the other banks and mortgage companies how much they can charge people and small businesses to borrow money. In the end, everyone pays more than the base rate.

So how does it affect stock prices? The int. rates have many effects on stock markets worldwide. Here are some points to consider:

a) Most firms borrow money to expand – for example, a company in May borrow $ 1 million at 5% interest per year. This means that each year, the company will owe $ 50,000 in interest. If the company uses the money borrowed to buy a new machine or a new shop producing a profit of $ 70 000, the company makes a profit of $ 20 000. If the rate drops to 3%, the company has $ 30 000 per year, which means that their income is now $ 40 000. The flow on effect of this increased profit means a higher value actions. But what if the interest rate is 10%? The company now has $ 100 000 in interest. Therefore, it is spending $ 100 to $ 000 $ 70 000 .. opps! If a company starts to lose money or make less profit, the stock price will fall.

In summary, the higher rate means less profits for businesses, because it becomes more expensive to borrow money, which in turn reduces the stock price. Lower rates, money is cheaper to borrow, so more profits are made and higher stock prices result.

b) Most people borrow money to buy expensive goods – When interest rates rise, people should put more money into mortgages and / or Pay for purchases with a credit card, which means that there less money left over (called disposable income) for the purchase of other goods. If people buy less, companies make less profit, which lowers the price of the shares. When rates fall, people have more money in their pockets to spend on goods and services, which leads to profits higher and the share price. In times of bad economy, the government will recommend interest rates to be lowered to "encourage" people to spend more.

c) payments to the company with best interest rates below – Let's say you bought a share for $ 1 and it has paid a dividend of $ 0.05, representing a yield of 5%. If the base rate falls to 4% you only $ 0.04 per U.S. dollar at the bank. Therefore, when INT. rates fall, share dividends are more attractive and thus stimulate demand, which leads to stock prices.

d) the lower rates the next time a company needs to borrow money, he will not have to pay the bank the same. This means that the company can continue to grow, increasing profits and share prices.

Therefore, you can see in this short article that interest rates have a much wider impact on people's lives than what is in their accounts bank. If you predict that rates will fall, investing in shares is an excellent idea. However, if you think rates are too low and will increase, it may be good time to sell the shares.

Doug has been writing articles online for nearly 3 years now. Although he specializes in financial topic such as commodities and equities, you can check out his latest website, PlasticCocktailGlasses.org, which discusses the various types of plastic cocktail glasses, such as plastic martini glasses, as well as some useful information for that big upcoming cocktail party!