Interest Rates

Aug 12, 2022

Interest Rates

The sweet premium investors are willing to pay to borrow money to break up their total payment sum at the onset.

Interest rates affect stock, crypto assets, and real estate investments differently.

Why do interest rates matter when it comes to stocks and cryptos? Typically, higher interest rates tend to negatively affect earnings and stock prices (there are several exceptions to this). There are many reasons for this occurrence.

At the highest level, interest rates are determined by a central bank.

The most notable central bank in the world is the central bank of the United States, known as The Federal Reserve System (Fed). The interest rate trickles down and changes shape when different actors (banks, asset managers, funds, and businesses) engage in borrowing and lending interactions.

Generally, when interest rates rise, businesses and consumers cut back on spending because borrowing (a tenant of growth) is more expensive. This causes markets like the stock market to fall as earnings decline or contract. When interest rates drop, consumers and businesses increase their spending (growth is cheap again), causing stock prices to rise.

In the real estate market, a higher interest rate environment makes acquiring property more expensive which ultimately causes market activity to slow down. Furthermore, since investors with mortgages are required to pay interest, often their mortgages will increase, making them more expensive and less attractive options.

The Takeaway -

Investors should therefore maintain a pulse on the goings-on of interest rates as they will affect an investor's ability to borrow money affordably and grow their portfolio.

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