Thread by @Bjybnf

A must read thread for every person. A thread on how interest rates affect our stock market.

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Interest rates are one of the most important factors determining the behaviour of the markets. There is generally an inverse relationship between the market and rates .

For example, when interest rates are high, money is driven out of the stock market, causing stock prices to decline, as interest-bearing instruments can yield better returns.

Similarly, low interest rates encourage the flow of money into the market, driving up prices, as the returns on stocks (dividends and capital appreciation) seem to be better than the interest received outside the market.

Rising interest rates also cause a drop in retail sales (it becomes more expensive to borrow for consumer goods). Falling sales eventually lead to reduced corporate profits, which cause the stock market to fall, and ultimately higher unemployment.

When day trading, traders can use interest rate announcements as a signal to stay out of the market until the dust settles.

Another consideration is corporate bonds. Riskier than Treasury bonds, companies borrow money with these instruments by offering average interest payments on them. The higher interest rates, in general, the higher corporate bond rates must be to be competitive.

And paying those interest payments (the 'yield') can become crippling for companies in times of high interest rates. Government bodies have control of the 'discount rate' (or 'base rate'), and revise it from time to time to try to control the economy.

The discount rate is the rate at which a country's central bank will lend money to retail banks. They in turn 'mark up' this rate before passing it on to their customers.

In recessions, governments lower discount rates in order to encourage borrowing and spending. If inflation starts to get out of control, the discount rate may be raised in order to discourage spending and put the lid back on rising prices. Related topic - T-Bills.

These are short term bonds issued by the Government to raise cash.They last only up to 26 weeks, and usually return a good rate of interest relative to interest rates generally.

Therefore , in this thread, we have tried to understand how interest rates determine the behaviour of stock market.

I hope you all learn something new today. I post such threads every day.
Follow me for regular stock market learning.

#Gann #StockMarket #trading