The interest rate is the amount of money due in a particular period as a proportion of that amount that has been borrowed. In simpler words, it is the cost that one pays for the use of a certain amount of money for a certain period of time. One of the major concerns among business owners is the uncertainty of how interest rates can affect their business and that of the demands of the consumer. It is mostly understood that investors expect that when they buy shares of a company they become part owners of the business and are equally affected by its profits or losses.
Reasons For Changing Interest rates
- Political gains are considered to be one of the major causes of changing interest rates.
- Inflation also leads to changing rates as money will buy fewer goods in the future than it does now due to change in the economy as well.
- Investment risks wherein the borrower is charged a risk premium to ensure that in case he defaults, this premium will compensate for his failure to pay up.
- Banks tend to charge different rates to slow down or speed up the economy and related growth.
- General economy of the country affects interest rates. Stronger economy attracts higher interest rates and weaker economy calls for lower interest rates.
Impact on Company’s share price
- Higher interest rates decrease the demand for company shares as people do not want to take risks of losing money.
- When interest rates go up, existing share prices tend to fall rapidly, causing investors to sell them at lower rates.
- Higher interest rates make borrowing also more difficult and much more expensive as well. Companies are compelled to pay floating interest rates which in turn has a lot of negative effects on the prices of existing shares.
- Lower interest rates serve as catalysts for growth; in fact, they are a benefit for personal as well as corporate borrowing of money and increase the value of the company’s share prices.
- Low rates are associated with better business dealings and it has a positive effect on the share value and subsequently, the prices tend to rise.
- Low-interest rates decrease the cost of cash and investors are more than ready to buy more stocks.
We can conclude that both high and low interest rates having varying effects on the company’s share price and Fintech Ltd are a firm which provides advice on which are the right investments to make at the right time.