The stock market can provide investors with opportune conditions to profit — if they have sufficient knowledge and an astute awareness of the factors which affect prices.
In order to become a successful stock trader, you’ll need to understand how to use fundamental and technical analysis, alongside your research of the market, to make informed decisions.
With this knowledge, you can speculate on some of the world’s largest and most successful companies using stock trading platforms, which will enable you to open a position and start trading today.
It’s also important to remember that the stock market is extremely volatile, and responds to external factors, which can include:
- Geopolitical and macroeconomic events
- Investor sentiment
- Political events
- News releases
- Company data releases
Another key factor that influences the stock market is interest rates, since these are a key indicator of a country’s economic health, and in turn, can impact the performance of companies.
Interest rates can be used by a country’s central bank to control inflation levels, and there has been growing concern that the US Federal Reserve could increase interest rates in order to deal with inflationary surges.
In this article we will look at how interest rates affect stocks, and how fears of increasing US interest rates have affected the stock market.
Interest rates and stocks
The Federal Open Market Committee (FOMC) is responsible for establishing targets for the federal funds rate. This is the rate of which money is borrowed by, and lent to, banks. It can completely alter the infrastructure of the country’s economy, as well as impacting the US stock market.
It typically takes around 12 months for the effects of changing interest rates to take hold of the US’ economy, however, the stock market can feel the repercussions almost instantaneously.
When you open a position in the stock market, you own a minute portion of the company, whom you have purchased shares from. This means any changes to the businesses’ earnings will impact your investment.
When interest rates are increased, businesses will experience increased borrowing costs. In addition, this will also impact the company’s sales, because interest rates can affect living costs, meaning that individuals have less disposable income to spend on products and services.
To summarise — higher interest rates can negatively affect company earnings and therefore, cause stock prices to fall.
How the market responded to US interest rate fears
Many of the world’s economies are experiencing a surge in inflation, prompted by the coronavirus pandemic and recent increased economic momentum. The US is no exception, and rising inflation rates have caused investors to pre-empt an increase in interest rates by the Federal Reserve.
Following this concern, the FTSE 100 fell by 0.5% and Wall Street stocks decreased significantly.
Although other central banks, like the Bank of England, for example, have increased interest rates, they have done so at a steady rate. If the Federal Reserve were to increase interest rates significantly in the US, this could have adverse effects upon the stock market, which has already begun to experience losses as a result of investor sentiment.
The stock market can prove to be a worthy investment, if you do your research and make well-informed decisions. Interest rates can significantly impact the stock market, but you can plan ahead for this data release by employing an economic calendar.
This will tell you when a country’s next customer price index (CPI) will be released — which contains interest rate data — meaning you can prepare in advance, for any price movements which could occur if interest rates are changed.