Glossary
Interest Rates
The cost of borrowing money, steered in part by central banks, and one of the few things that moves nearly every stock at once.
A central bank sets a short-term rate, and that rate ripples outward into what banks charge each other, what companies pay on their debt, and what a savings account or a government bond returns. When it moves, the price of money moves for everybody at the same time.
Two links run from there to share prices. The first is direct: a company that borrows pays more interest, and that comes straight out of profit, which is why heavily indebted businesses react more visibly than debt-free ones do. The second is comparative: when safe assets pay more, the return people require from a risky one rises too, and a share price is what somebody will pay today for profits that arrive later.
That second link is why rate news moves a stock whose business has not changed in any way. It is also why companies whose profits are expected mostly in the distant future tend to react more sharply than companies earning steadily today, since a change in the rate applied to those distant profits compounds across more years.
Related terms
- InflationThe rate at which prices across an economy rise over time, which reduces what a fixed amount of money will buy.
- RecessionA broad, sustained contraction in economic activity, dated in the United States by a committee of economists after the fact.
- Debt-to-Equity RatioHow much a company owes compared with what shareholders own, where a ratio of 1 means the two are equal.
- Growth StockAn informal label for a company whose revenue and earnings are expected to expand faster than the market average.
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