Interest rates have an important relationship to profit in many different financial scenarios. Whether it be business, personal finances or financial markets, interest rates play a key role.
In business, interest rates and profit often have a negative correlation. Low interest rates allow businesses to borrow money cheaply. This results in businesses being able to fuel growth inexpensively and thus increase profits.
Higher interest rates are good for savings. While higher interest rates make it more expensive to borrow money, the interest paid on savings also increases. Therefore, high interest rates are profitable for individuals with lots of money in savings.
In Forex, currencies are traded in currency pairs such as the eurodollar (EUR/USD). Whenever an investor enters a Forex market, they are essentially buying one currency and selling the other. When an investor buys a currency with a comparatively higher interest rate than the currency she sells, she receives a daily account credit that reflects the interest rate difference. Therefore, when a currency has a high interest rate, this adds to the profitability of a Forex position.
Interest rates exert an influence on the stock market in that low interest rates may boost overall stock market performance. When interest rates are low, investors are not able to earn much money in bonds or savings. This means that investors are more likely to put money into the stock market, boosting the overall market. This kind of situation increases potential stock market profits because there is increased activity in the stock market.
Adam Parker is a writer from Virginia. He holds a Bachelor of Science from James Madison University. Parker has written articles for online sources including The Motley Fool, Gameworld Network and Glossy News.