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Effect of increasing interest rates on stocks



   Increasing interest rates tend to hurt stocks.  Why?  There is 
   more than one reason: 

   1.  As interest rates go higher it costs more to do business, 
   cutting down profits.  It costs a lot more to produce an item 
   if you are paying 15% on borrowed money than it does if you are 
   paying 3%.  When profit falls the stock is not worth as much. 

   2.  Higher interest rates reduce the demand for stocks, causing 
   them to drop in value, by attracting available money away from 
   them into less risky money markets, CD's and short term paper.  
   If you can get 15% on your money in safe, government insured 
   CD's why risk investing it in stocks?  If, instead, you can 
   only get 3% from CD's perhaps you will be willing to take the 
   risk of investing in stocks.  The investor has several options 
   on where to invest his money (stocks, bonds, real estate, money 
   markets, etc.) and he places it where he can get the best 
   return with least risk. 


   May 2000


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