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The Impact of Interest Rate Changes on Stock Price

Why does therise and fall of interest rate and the change of stock price move in reverse?There are three main reasons:

①The rise of interest ratewill not onlyincrease the company's borrowing cost, but also make it difficult for thecompany to obtain the necessary funds. In this way, the company has to reducethe production scale, and the reduction of the production scale will certainlyreduce the company's future profits. As a result, stock prices will fall. Onthe contrary, the stock price will rise.

②When the interest rate rises, the discountrate used by investors to evaluate the stock price will also rise, so the valueof the stock will decrease, thus the stock price will drop accordingly;otherwise, the interest rate will decrease, and the stock price will rise.

③When the interest rate rises, some of thefunds will shift from investing in the stock market to bank savings and fixed incomesecurities, which will reduce the demand for stocks in the market and cause thestock price to fall. On the contrary, when interest rates fall, theprofitability of savings will decrease, and some funds may flow from banks andbond markets to the stock market, thus increasing the demand for stocks andraising stock prices.

Since it isa general situation that interest rate and stock price move in the oppositedirection, investors should pay close attention to the rise and fall ofinterest rate, and make necessary forecast on the trend of interest rate, so asto make a decision on stock trading before interest rate changes.

In China, weshould pay more attention to the changes of the following factors in order topredict the rising and falling trend of interest rates:

①The change of loan interest rate. As theloan funds are supplied by deposits, it can be inferred that the depositinterest rate will decline according to the reduction of loan interest rate.

②The economic trend of the market. If themarket is prosperous and prices rise, the state may take measures to raiseinterest rates and reduce market pressure by attracting residents' deposits. Onthe contrary, if the market is weak, the country may start the market bylowering the interest rate level.

③The tightness of the capital market and the interest rate level of theinternational financial market. The interest rate level of international financial marketcan also affect the rise and fall of domestic interest rate level and the riseand fall of stock market. In an open market system, money has no nationalboundaries. If the overseas interest rate level is low, on the one hand, itwill have an impact on the domestic interest rate level, on the other hand, itwill also attract overseas funds into the domestic stock market, driving up thestock price. On the contrary, if the overseas level rises, the opposite willhappen.

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