Stock Preacher

Interest Rate

Rising and falling interest rates offer a special risk to stock investors. Historically, rising interest rates have had an adverse effect on stock prices. I outline several reason why:

Hurting a company’s financial condition

Rising interest rates have a negative impact on companies that carry a large current debt load or that need to take on more debt because when interest rate rise, the cost of borrowing money rises, too. Ultimately, the company’s profitability and ability to grow are reduced. When a company’s profits drop, its stocks become less desirable, and it stock price falls.

Affecting a company’s customers

A company’s success comes when it sells its products or services. But what happens if increased interest rate negatively impact its customers? The financial health of its customers directly affects the company’s ability to grow sales and earnings.

For a good example of this situation, consider what happen to Cisco System in 2000. Because a hugh part of its sales went to the telecommunications industry, Cisco’s profitability depend on the health of that entire industry. The telecom industry’s financial Achilles heel, which, in turn, become a pain in the neck to Cisco. Because telecom companies bought less, Cisco profits shrank. From March 2000 to March 2001, Cisco’s stock fell by nearly 70 percent! As of September 2001, Cisco stock price continued to decline because the companies that were Cisco’s customers where hurting financially.

Impacting Investors’ decision-making considerations

When interest rates rise, investors start to rethink their investment strategies, resulting in one of two outcomes:

Investors may sell any shares in interest-sensitive stock that they hold. Interest-sensitive industries included electric utilities, real estate, and the financial sector. Although increased interest rates can hurt these sectors, the reverse is also generally true: Falling interest rates boost the same industries. Keep in mind that interest rate change affect some industries more than others.

Investors who favor increased current income are definitely attracted to investment vehicles that offer a higher rate of return. Higher interest rates can cause investors to switch from stocks to bonds or bank certificate of deposit.

Hurting stock price indirectly

High or rising interest rates can have a negative impact on any investor’s total financial picture. What happens when an investor struggles with burdensome debt, such as second mortgage, credit card debt, or margin debt? He may sell some stock in order pay off some of his high-interest debt. Selling stock to service debt is a common practice that, when taken collectively, can hurt stock prices.

Because of the effects of interest rates on Stock portfolios, both direct and indirect, sucessful investors regularly monitor interest rates in both the general economy and in their personal situations. Although stocks have proven to be a superior long-term investment, every investor should maintain a balanced portfolio that includes other investment vehicles, such as money market funds, saving bonds, and/or bank investments.

A diversified investor has some money in vehicles that do well when interest rates rise. These vehicles include money market funds, U.S. Savings bonds (EE), and other variable-rate investments whose interest rate rise when market rate rise. These types of investments add a measure of safetly from interest rate risk to your stock portfolio.

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Your Financial Net Worth Statement

Your net worth is an indication of your total wealth. You can calculate your net worth with this basic equation: total assets less total liabilities equal net worth. The table will shows this equation in action with a net worth of $169090 a very respectable number. For many investors just being in a position where assets exceed liabilities is a great news Use the table below as a model to analyze your own financial situation. Your mission is to ensure that your net worth increase from year to year as you progress toward your financial goal.

Your Personal Net Worth

One reason you continue to work is probably so that you can pay off your bills. But many people today are losing their jobs because their company owes, too!

Debt is one of the biggest financial problem in America today. Companies and individual holding excessive debt contributed to the stock market’s massive decline in 2000 and the U.S. Recession in 2002. If individuals managed their personal liabilities more responsibly, the general economy would be much better off.

One reason of the United Stated appeared to be doing so well during the late 1990s was the fact that individuals and organizations went on an unprecedented spending binge, financial mostly by excessive debt. The economy looked unstoppable. However, sooner or later you have to pay the piper. Stock prices may go up and down, but debt stays up until it is either paid down or the debtor files of bankruptcy. As of the 4^th quarter of 2004. U.S debt has surpassed a mind-boggling $37 trillion, which means that consumers, businesses, and government will continue dealing with challenging time through this decade.

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