how does interest rates effect share prices.?

Answer 1

I agree with the good answers of the earlier people. To put it in simple terms, Stock prices go the opposite way of interest rates. The reasons are something like this.
(1) The safest place to park money is bank deposits. Let us say their rate is about 5.5%. If you want higher return then you need to take higher risk. So investors expect higher return from stocks and start buying stocks thus putting upward pressure on stock prices. If bank rates go up to 10% then people prefer to park money in banks and pull out money from stocks. So stock prices go down.
(2) Interest rates affect profits in two ways. First, almost all companies borrow money to finance capital equipment and inventory. Similarly customers borrow money to buy goods. for example car loans etc. When interest rates go up, companies have higher debt burden which reduces their profits. At the same time customers face difficulty in paying their loan instalments and hence reduce/postpone spending on capital intensive items like automobiles and housing.
(3) In the stock market margin money is financed by brokers at a certain rate of interest. If they increase rates then margin money borrowers reduce their outstanding positions by selling their stock thus putting downward pressure on stock prices.

Answer 2

I believe previous answers gave good information, but I could add that the more the interest rates go higher, the more money designated for investing finds safe harbors like government bonds.

Once when rates were in the teens, money stood in bank CD's and Bonds, and the stock market was weak. (The Dow Jones was less than 1000 in the 1970's when there was high inflation)

In today's market, if you get a safe return of over 5%, that's worth it to many to keep money out of the stock market.

We're in a different situation that was going on 30 years ago.

Today, 5% is a high return based on what they tell us...there is little or no inflation.

Oil prices jumping higher is a sign of inflation. Should they drop, and some feel they will, then the stock market will get strong again.

I can't predict with certainty what the stock market will do, but it seems that if interest rates stop rising and perhaps may trend even lower, then the stock market could be where money goes.

Watching the flow of huge sums of money is like watching where a school of fish go. They go one way and another, and you never know where they're going next, only that the governing factor is interest rates.

...which is why Ben Bernanke is king of the world.

Answer 3

There are several good postings about regarding how interest rates impact cost of borrowing and raising capital to fund business activities.

Two other impacts that should be considered:

(1) some industries are rate sensitive; for example utilities are often highly leveraged with large amounts of debt to support their large physical infrastructures. This means that a change in rates has a much greater impact on their bottom line than firms in other industries might see. Banks are probably another example where changes in the levels of interest rates have a more direct impact to the bottom line than other industries.

(2) share prices (of widely traded stocks) represent the investor's expectations for future earnings. Depending on where the market is in the 'rate cycle', because interest rates are one of the primary monetary policy tools used to manage inflation, there are cases where rate increases are perceived as signals about future macro-economic trends - like inflation and unemployment ... which can change investor expectations and push share prices up (if perceived as a favorable economic signal) or down (if perceived as unfavorable).

Answer 4

Interest rates affect share prices because some investors borrow money to invest in shares and when the cost of borrowing for that purpose goes up, with a hike in interest rate, on one hand some such investors may be forced to offload their portfolio prematurely to reduce loss; on the other hand, investors may borrow less to invest in equity and as such there will be a decrease in demand for shares and hence the prices thereof.

Answer 5

If interest rates increase, it affects corporations for three reasons.

The value of the company is equal to the present value of its future cash flows. If rates go up, then the present value of those cash flows will come down -- so firm value will decrease. It will decrease more for growth firms -- since their cash flows are far out to the future. It will decline less for firms tha have lots of cash and are not growing quickly.

The value of the firm is also equal to the sum of debt plus equity. With rates going down, the market value of a company's debt will decrease. It will decrease more if it is long-term debt. Short term debt will decrease very little.

For most firms, the value of the company will decrease more than the value of their debt -- so equity values will fall. For a few firms (those with larger short term cash flows and long term debt) the value of debt could fall more than the value of the firm, so their equity value could actually increase.

There is another reason why firms lose value when rates go up. New projects become harder to fund. If rates increase, some projects that would have a positive net present value (NPV) lost some of that value -- or even become negative NPV projects.

If rates go down, the opposite story holds.

Answer 6

Money is a commodity like everything else in the stock-market.

If interest goes up it is cheaper to have money and more expensive to loan it. You could say money is more expensive.

This effects how businesses have handled their money flow and therefore will influence their stock price.

No more to it then that. Though how much and when is the BIG question. Because there is where the big bucks are made.

Answer 7

Generally, rising interest rates drive down the value of stock shares, in part because it makes alternative investments (e.g., bonds, bank certificates of deposit) more attractive because the yield on these instruments go up as interest rates go up.

Answer 8

If interest rates are high, people borrow less money to invest in the stock market

Answer 9

it has a great impact on share price..
it affects a person's buying power or spending capacity...that way it affects many industry's net sell figure...

second thing is people borrow less for investment ...so it decrease the money circulation in the market..
and negatively affects the stockmarket

Answer 10

There is a quote I heard years ago
"WHEN INTEREST RATES ARE HIGH STOCKS WILL DIE", don't remember who said it.