How do Interest Rates Impact the Stock Market?

How do the interest rates affect the stock market?
When you listen to financial news or read about the markets you frequently hear questions such as, “When is the Fed raising interest rates?”
At its core, interest rate is simply the cost of using someone else’s money. The interest rate that the investors mostly refer to is the rate at which the Federal Open Market Committee sets for the Federal Funds, and at which banks borrow from and lend money to each other.
This borrowing and lending activity affects the entire economy, including the stock market. Interestingly, the interest rate change takes about a year to affect the widespread economy, but the investors and markets react instantly.
As an investor it is crucial to understand the relationship between the interest rates and the stock market. The Fed changes interest rate to control inflation. Simply put, the Fed increases the rate to decrease money supply. When the interest rates go up it is more expensive to obtain money. The opposite is true as well, when the interest rates go down it makes borrowing money much easier, which leads to more spending.

The United States has the Federal Reserve, other countries have central banks that do the same. This interest rate is also important because, the prime rate is more or less the same, which is the rate at which the most creditworthy customers borrow money from commercial banks. The prime rate is what determines the mortgage rates, your credit cards’ annual percentage rate (APR), and other business and consumer loans.

Let’s look at what happens to the economic and investing activity when the interest rates rise…

From the discussion so far there has been no mentioning of interest rate changes directly impacting the stock market. So how does the rate at which banks borrow money from each other affect stock prices?

When the interest rates increase, the prime rates also increase, which increases the credit card rates and the mortgage rates. Since the average consumer has to pay more for these items, they are left with less disposable income. In other words, the consumer has less money to spend on low priority important items.

If a hotel chain depends on people to spend on vacation packages, its profits will drop because people having less disposable income. Similarly, households will be more reserved in their spending, which could look like cutting down on restaurant bills and cheaper brands for grocery shopping.

But businesses are affected in a more direct way as well. Businesses borrow money from banks to expand their operations. When it becomes more costly to borrow money, they curb or revise their expansion plans. As they cut down on expansion it slows the growth. Depending on the business model it might even trigger cutbacks.
When these factors reduce the net income of a listed company, its stock price usually drops. And this is how the change in interest rate impacts the stock market.

[rosfa]

This explanation is good but incomplete. The other reason higher rates impact the stock market is because the value of stocks is determined by the present value of future cash flows; they are discounted at a rate which also increases. Hence the same cash flows have a lower present value which lowers the value of the stock

[tomstuppence]

This is the best explanation I have found on YouTube. Simple and easy to follow in comparison to other videos. Thankyou for this content

[BillyBoggle]

As many have already said: succinct, simple, and elegant educational video, sir. Cheers

[Sevomato]

Oh my god, this gotta be the best and logical explanantion i found so far on youtube on this topic. Well done!!!!

[shainz]

Now this is wot is called fabulous presentation in simple way …. Thanks 🙏

[SVC-hzdq]

Excellent !!! The explanation couldn't be any more clear.

[jasmines]

Thank you for this clear and concise explanation 👍

[tmoss]

Good explanation. Short. Simple. Easy to understand. Thank you

[robertlambert]

it always looks like the market conditions are never right. i have been a victim of that same outlook because it never seems right. I have learned a lot these past few months to doubt that opportunities abound in the financial markets. only thing is to know where to look. my advise to any investor is not to buy into the bullshit of an imminent market crash since it's all bogus hype. I have seen tremendous growth in my portfolio even to the heights of $120, 000 in a good month. it's ironical but the market is always the same. same old events, same old arguments, same old analyses by 'gurus', same old fears. only the dates are different. it always is, and always never is the right time

[aznstride]

Every video has a comment “This is the best explanation I seen on YouTube”

[choyonmazumder]

Very perfect and precisely said. I was actually looking for something like this.

[DaRyteJuan]

1:05 “federel reserve” lol. Is that where Roger Federer puts his money?

[Rbaggoriya]

So if the FED interest rate rises the stock market came down to some extent and vica versa....what are the factors for decide interest rate rise or fall and do IR only increase per annum...????

[zenith]

What if i buy banks stock during high interest rate period?

[mdelv]

Why have you stopped uploading videos? Excellent teacher

[choudhary]

wow, what a beautiful, clear cut explanation 😉

[choyonmazumder]

Summary
When interest rate increase, there happen two things. Firstly, when interest rate increases m, banks rises their interest rate charged to the consumers in the form of credit card fee etc. This causes the consumers to end up with less disposable income. Then they reduces their spending. This means business losses sale.
Secondly, when interest rate rises, banks also rise their interest rates to be charged to the business. This causes the business to borrow less. This reduced the growth of the business.

THESE two events lowers the net income of business. This causes the share price to decline.

This is how increase in interest rate lowers stock price.

[rasinahbinteshaiksafiudeen]

does high interest rates benefit bank stocks? this is because banks receive high interest income

[dwightk.schruteiii]

So if interest rates go negative, than companies can get paid to borrow money that they would use to expand their business, which would then significantly raise the company’s value which then raises the company’s stock? 🤔

[bettyboo]

Actually you will probably find that stock prices decrease with interest rate reductions and increase when the rates are set higher. That’s what I have found the case to be.