In this guide we will talk about how the increase or change in interest rates affects investments. Also in connection with investments, We suggest you know the difference between economic investments and financial investments.
What are interest rates?
The interest rate is the amount of money that is generally granted on a credit or loan, its value is calculated as a percentage of the amount of money that has been obtained from the loan. This digit must be paid together with the initial amount once the debt is canceled, we could say that interest rates are the price of the use of money.
You have to pay attention that interest rates are a way to guarantee the money that is being lent, since from when the money is lent until it is paid, an additional amount accumulates that You can protect the investment of the person who grants the loan feasible inflation, thus avoiding the money you receive has a lower value than the one you initially gave.
It is essential to know that interest rates can go up or down depending on the economy of where you are., even though in general these rates are imposed by the Central Bank of each country.
What are the existing effects on interest rates?
Even when they seem like an insignificant detail, interest rates provide a great influence on the economic sectors of the regionThese can be positive or negative, depending on the trend they take, since the increase in price or the low cost of the same directly impact the behavior of consumption, the ability to save, investments or demand for goods and services.
When we talk about a very high interest rate, we directly affect the productive sector, since it becomes more difficult apply for small business investment loans or large companiesThis, at the same time, hurts the demand for services.
As the investment cost rises, few will have the opportunity to start their own business and therefore no more jobs will be generated., in the end the last harmed is the family economy, that by presenting this whole picture you will have less and less chance of obtaining goods. and services.
On the other hand, if there is a low interest rate, Investors will find it much more attractive to invest, since it will not be so difficult to cancel the debt, giving rise to the creation of new companies or small companies that will generate jobs. At the same time, increased production lowers costs, making the acquisition of goods and services more affordable for the family economy.
Why do interest rates tend to rise and fall?
The main reason why interest rates tend to rise is inflation, if we live in a country whose inflation margin is growingTo guarantee the borrowed money, banks raise interest rates; Since as the days go by, it probably won't be worth the same as when the loan was made.
On the other hand, interest rates tend to fall or rise due to the demand for loans in the market, if investors are not interested in investing in a loan due to high interest rates, in the long term banks will tend to lower them to attract the attention of new investors. If not, there is a lot of demand, the bank will proceed to raise rates.
How does this variation affect us?
Investors don't like interest, since certainly habitually affect pocket. Whatever the case, Let's analyze what an interest rate hike does for both small and new traders, as for those interested in the bag. At the same time, We invite you to know what the theory of loanable funds and the real interest rate consists of.
Interests for the new merchant
In the event that you start a business shortly before an interest rate increase, certainly could be affected in the long term. In countries with a relatively stable economy, interest rate increases do not immediately impact. Either way, over time these measurements will appear.
By the merchant, an increase in interest rate (depending on its legal nature) it will mean paying more to the treasury (or relevant entity of the nation). Clearly, this implies an additional expense for investors or traders, so it is necessary to act.
As usual, an increase in the price of the product may seem like a solution, but this has long-term negative repercussions. One of them is that there opportunity to lose customers, because nobody likes the price of the products they consume to go up.
On the other hand, if the price increase after an increase in interest rates becomes a general trend, could hit the inflation point. Whatever the case, in stable nations, there are regulations and certain controls based on prices. Beyond interests, inflation could certainly represent a big social problem.
Interests in the stock market
In the case of the stock market, changes in the interest rate do not have an immediate effect, at least not for the average user. Either way, the interests make any type of loan. it becomes more expensive. This increase in global value will sooner or later reach the average consumer and will affect them more or less directly.
In the case of shares, changes in interest rates may cause buyers not to deliver expected figures. In other words, assuming you have shares in a specific company and want to sell them, an increase in interest rates generally makes the supply lower.
Conditions that impact the economy at a general level
An increase in interest rates usually has an economic impact, but there are other manifestations even more damaging. Let's analyze then those aspects that can be destructive for the economy of a region or country.
Inflation
In summary, We call inflation the imbalance caused by the price increase on most products. This translates into lower purchasing power, In other words, the salaries are the same, but the products are more expensive.
Inflation is undoubtedly one of the most serious economic problems and has led very well positioned nations to very considerable economic crises.. Thus, at a general level, inflation is one of the economic problems that can most affect an investment. In connection with this, We suggest you know what is the link between the interest rate and inflation.
Financial mismanagement
The economic mismanagement at a general level, are the cause of crisis both in nations and in institutions. We refer to all those measures that deviate from the economic criteria.
Many people point to statism as one of the causing the problems economic. Certainly, there are many causes, But improper administration of a government or company will affect everyone under it., In other words, the population or the workers.
On the other hand, if you want more information about the interests, it is recommended that you know the difference between accrued interest and income interest.
