When the rate of interest increases what will be the effect on the shares?

When the rate of interest increases what will be the effect on the shares?
Interest rates. Most people pay attention to them, and they can impact the stock market. But why? In this article, you will learn some of the indirect links between interest rates and the stock market and how they might affect your life.

The Interest Rate
Essentially, interest is nothing more than the cost someone pays for the use of someone else's money. Homeowners know this scenario quite intimately. They have to use a bank's money, through a mortgage, to purchase a home, and they have to pay the bank for the privilege. Credit card users also know this scenario quite well - they borrow money for the short-term in order to buy something right away. But when it comes to the stock market and the impact of interest rates, the term usually refers to something other than the above examples - although we will see that they are affected as well.

The interest rate that applies to investors is the Federal Reserve's federal funds rate. This is the cost that banks are charged for borrowing money from Federal Reserve banks. Why is this number so important? It is the way the Federal Reserve (the "Fed") attempts to control inflation. Inflation is caused by too much money chasing too few goods (or too much demand for too little supply), which causes prices to increase. By influencing the amount of money available for purchasing goods, the Fed can control inflation. Other countries' central banks do the same thing for the same reason.

Basically, by increasing the federal funds rate, the Fed attempts to lower the supply of money by making it more expensive to obtain.