Why do rising interest rates cause the stock market to decline?

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In a very brief and prices wording:

Raising interest rates by monetary authority allowing most of the economy's community sectors (especially family sector) to direct their investments and savings toward banks' secured investment tools like time deposits and CDs. for more liquidity and minimizing risks instead of directing same toward stock market. 

Consumer Conditions The rise in the interest rate affects the stock markets indirectly through the consumption capacity of citizens, which are affected by the interest rates applied within the country.

An increase in the cost of bank borrowing from the central bank would also pass that increase to people through a quarter of all loan costs.

Individuals are therefore affected by an increase in interest rates on credit cards and mortgage rates, especially if these loans include a variable interest rate, which reduces the amount of money the individual spends afterwards.

Then comes the billing problem. When they go up, people find themselves in low cash deposits, which means they will spend less money, which affects the company's profits and revenues. The profit and revenue levels of any company affect the performance of its shares.

Investors usually choose between a large number of investments, but ultimately a safe and risky investment, giving the latter a high return compared to safe investments.

But as banks raise interest rates on deposits and investment certificates, investors turn to these categories of safe assets away from stocks that represent a risky investment

The raising of banks to interest on loans granted to investors increases the cost of leverage and threatens investors to default on their debts and may support the sale of shares to pay the dues of brokerage firms or banks, which reduces stock prices.

Doing Business Like individuals, companies borrow to continue their business. When banks raise the cost of borrowing, the cost will also be higher for companies, which may reduce their rate of borrowing towards the reduction.

Some companies may be tempted to disrupt their expansion plans and new projects, eventually reducing the share price of the company listed on the stock exchange.

When the company faces higher borrowing costs by cutting spending or profits, estimates of cash flows will decline.

On the basis of this, the share price of the company facing such circumstances will be subject to a subsequent decline.

As a result, the decline in share prices will lead to a complete decline in the market or indices such as Dow Jones and Standard & Poor's, so the entire stock market will fall.

Investors with lower cash inflows and negative outlooks will be reluctant to invest heavily in the market, and eventually investing in equity markets is seen as risky compared to other assets.

What about interest rate cuts?

If the increase in the interest rate negatively affects borrowing, its reduction stimulates financial stimulus activity, so the effect associated with the increase in interest rates is quite the opposite of reducing them.

The cut in interest rates is a stimulus to the economy and financial markets, helping people and businesses to borrow, which will eventually revive the economy.

The cut in interest rates creates an investment climate that stimulates companies to grow and eventually increase stock prices.

What stocks are most affected by the interest rate decision?

Commodities and services .. Companies that rely directly on consumer purchases are indirectly affected by interest rates.

For example, individuals with investment accounts and certificates will benefit from higher interest rates and are adversely affected by their reduction, and their purchasing decision will therefore be affected accordingly.

On the other hand, debtors to banks will be adversely affected by higher interest rates because they will withdraw from income to pay higher interest and thus reduce their purchases of goods and services.

Banks and financial institutions .. The interest rate may be a double-edged sword for banks, the increase in rates means higher interest on borrowing and thus increase the profitability of banks.

Banks can also win the difference between what you pay for savings accounts and certificates of deposit, and what you can win against high rated debt such as treasury bonds.

But at the same time, their increase may reduce borrowing because its costs are rising, ultimately reducing profits.

Insurance companies .. The relationship between the insurance companies and the interest rate written, so when they increase, those companies benefit, as they tend to have stable cash flows are forced to carry many of the debt secured to support insurance policies.

Increasing trend of intrest rates always attract investments in bank securities, term deposits etc. therefore the diversion of funds are being common towards banking products from different markets, in result declining trends are held on other markets such as stocks, real state.

When the Fed increases the federal funds rate, it does not directly affect the stock market. The only truly direct effect is that borrowing money from the Fed is more expensive for banks. But, as noted above, increases in the federal funds rate have a ripple effect.

Because it costs them more to borrow money, financial institutions often increase the rates they charge their customers to borrow money. Individuals are affected through increases to credit card and mortgage interest rates, especially if these loans carry a variable interest rate. This has the effect of decreasing the amount of money consumers can spend. After all, people still have to pay the bills, and when those bills become more expensive, households are left with less disposable income. This means people will spend less discretionary money, which will affect businesses' revenues and profits.

But businesses are affected in a more direct way as well because they also borrow money from banks to run and expand their operations. When the banks make borrowing more expensive, companies might not borrow as much and will pay higher rates of interest on their loans. Less business spending can slow the growth of a company; it might curtail expansion plans or new ventures, or even induce cutbacks. There might be a decrease in earnings as well, which, for a public company, usually means the stock price takes a hit.