Hi there!
Generally, interest rates has a negative correlation with stock prices. Hence, when i/r increases, stock prices decreases. This is due to 2 main reasons!
1) When interest rate increases, cost of borrowing increases and firms may delay planned projects as it is now harder to secure financing. Moreover, it means that interest payments on existing loans/debt obligations will increase - resulting in lower net income and retained earnings (and potentially lower dividends) - translating to lower share prices (using the assumption that the current share price reflects the future cash flows that the company can generate and how holders of the shares may liquidate their shares due to the fact that prospects of the firm making profits will be dimmer
2) Increase in interest rates means that it could now be more attractive for people to simply put money in a bank/fixed-income instrument since they are generally very safe, hence investors might allocate their investments in stocks into bonds etc. As mentioned, if there is an increase in supply of shares and a decrease in demand for them, share prices is going to drop as well.
Hi there!
Generally, interest rates has a negative correlation with stock prices. Hence, when i/r increases, stock prices decreases. This is due to 2 main reasons!
1) When interest rate increases, cost of borrowing increases and firms may delay planned projects as it is now harder to secure financing. Moreover, it means that interest payments on existing loans/debt obligations will increase - resulting in lower net income and retained earnings (and potentially lower dividends) - translating to lower share prices (using the assumption that the current share price reflects the future cash flows that the company can generate and how holders of the shares may liquidate their shares due to the fact that prospects of the firm making profits will be dimmer
2) Increase in interest rates means that it could now be more attractive for people to simply put money in a bank/fixed-income instrument since they are generally very safe, hence investors might allocate their investments in stocks into bonds etc. As mentioned, if there is an increase in supply of shares and a decrease in demand for them, share prices is going to drop as well.