Interest rate effect on stocks and shares.

snookerloopy96

Hello everybody, first time poster.
I have just opened a stocks and shares isa with Santander, more for the Top Cashback offer to start with.
Looking ahead at possibly investing a higher proportion of my money as opposed to saving do interest rates have much effect on stocks/shares?

eskbanker

It depends on what you're investing in within a S&S ISA, in that there are some low-risk investments that do correlate to interest rates, but equities don't.

El_Torro

Generally speaking a low interest rate environment is more conducive to growth in stocks and shares. On a very basic level if investors are getting a decent interest rate in cash why would they take the risk of investing in stocks and shares? Also companies benefit from low interest rates as they can borrow money cheaply and have more potential to grow. 

Arguably we've been in a low interest rate environment since 2008, with a small Covid related blip. Some investors might be surprised by what happens to their investments if we ever go back to an extended period of high interest rates. 

Having said all that interest rates are only part of a complex story. The correlation is not 100%. 

snookerloopy96

eskbanker said:

It depends on what you're investing in within a S&S ISA, in that there are some low-risk investments that do correlate to interest rates, but equities don't.

Thanks. As of yet I've not made any investments other than this one for the cashback offer, but as rates are falling I may end up putting more in stocks and shares. The way I am any investments would be low or medium risk.

snookerloopy96

El_Torro said:

Generally speaking a low interest rate environment is more conducive to growth in stocks and shares. On a very basic level if investors are getting a decent interest rate in cash why would they take the risk of investing in stocks and shares? Also companies benefit from low interest rates as they can borrow money cheaply and have more potential to grow. 

Arguably we've been in a low interest rate environment since 2008, with a small Covid related blip. Some investors might be surprised by what happens to their investments if we ever go back to an extended period of high interest rates. 

Having said all that interest rates are only part of a complex story. The correlation is not 100%. 

I agree about us being in a low interest environment for a while now. A lot of media or online things make 5% and 6% being 'high' when really they're not, certainly historically at least.

Thanks for the reply, the only reason I may look further into it is if rates continue to drop. I was reading back through these posts and a few years ago some savers were under 2% (?), if it got to that point again the stocks/shares option becomes more and more appealing.

eskbanker

snookerloopy96 said:

eskbanker said:

It depends on what you're investing in within a S&S ISA, in that there are some low-risk investments that do correlate to interest rates, but equities don't.

Thanks. As of yet I've not made any investments other than this one for the cashback offer, but as rates are falling I may end up putting more in stocks and shares. The way I am any investments would be low or medium risk.

Not sure if it's what you're implying but it would be a mistake to start investing solely because your return on cash savings is decreasing - saving and investing are two very different activities and each should be chosen for the right reason, based on objectives, timescales, risk tolerance, etc, etc!

tigerspill

snookerloopy96 said:

El_Torro said:

Generally speaking a low interest rate environment is more conducive to growth in stocks and shares. On a very basic level if investors are getting a decent interest rate in cash why would they take the risk of investing in stocks and shares? Also companies benefit from low interest rates as they can borrow money cheaply and have more potential to grow. 

Arguably we've been in a low interest rate environment since 2008, with a small Covid related blip. Some investors might be surprised by what happens to their investments if we ever go back to an extended period of high interest rates. 

Having said all that interest rates are only part of a complex story. The correlation is not 100%. 

I agree about us being in a low interest environment for a while now. A lot of media or online things make 5% and 6% being 'high' when really they're not, certainly historically at least.

Thanks for the reply, the only reason I may look further into it is if rates continue to drop. I was reading back through these posts and a few years ago some savers were under 2% (?), if it got to that point again the stocks/shares option becomes more and more appealing.

That (using interest rates) isnt necessarily the best thought process.  Savings and Investments are different things with different objectives.  It isnt an either / or situation and you use each for different reasons.  Investments are generally a long term thing - 10+ years, and savings are often a short term thing where you need fairly fast access (e.g. emergency money or money you know you will need soon).  So the choice should really be based on your financial strategy.   Then there are bonds and Gilts that diversify even further.  I have savings looking 5 years out; Indexed Linked Gilts for years 6 to 14 and equities for 15+ years.

Albermarle

eskbanker said:

snookerloopy96 said:

eskbanker said:

It depends on what you're investing in within a S&S ISA, in that there are some low-risk investments that do correlate to interest rates, but equities don't.

Thanks. As of yet I've not made any investments other than this one for the cashback offer, but as rates are falling I may end up putting more in stocks and shares. The way I am any investments would be low or medium risk.

Not sure if it's what you're implying but it would be a mistake to start investing solely because your return on cash savings is decreasing - saving and investing are two very different activities and each should be chosen for the right reason, based on objectives, timescales, risk tolerance, etc, etc!

To add to the above, if you do decide to invest, then going too low risk can make the exercise partly pointless.
The whole idea of investing is to take some risk in exchange for potential growth.

Low risk investments have their place, especially if someone has already built up a big pension pot and is near retiring, but they are not really very useful for building up a pot.

leosayer

Professional investors usually measure potential investment opportunities against the "risk free rate" which is the the level of return they can get from safe assets like government bonds ie. gilts.

Currently 10-year UK government bonds yield around 4.4% per year. If you are looking at making an investment now, how much of a higher (than 4.4%) return would you want to put your capital at risk by buying company shares?

As a result, in general share prices fall when interest rates rise and vice-versa although there are many exceptions to this such as banks (which can make more money with higher interest rates).

Interest rate generally rise to combat inflation which is why, over long time periods, equities are one of the best ways of protecting yourself from the damaging effects of inflation.

snookerloopy96

eskbanker said:

snookerloopy96 said:

eskbanker said:

It depends on what you're investing in within a S&S ISA, in that there are some low-risk investments that do correlate to interest rates, but equities don't.

Thanks. As of yet I've not made any investments other than this one for the cashback offer, but as rates are falling I may end up putting more in stocks and shares. The way I am any investments would be low or medium risk.

Not sure if it's what you're implying but it would be a mistake to start investing solely because your return on cash savings is decreasing - saving and investing are two very different activities and each should be chosen for the right reason, based on objectives, timescales, risk tolerance, etc, etc!

Not totally what I'm implying but its a little along those lines, or at least it might be if the interest rates really did bottom out. I'm too cautious to ever put TOO much money at stake, just the way I am. It would be very gently, very slow increments if I ever did.

snookerloopy96

tigerspill said:

snookerloopy96 said:

El_Torro said:

Generally speaking a low interest rate environment is more conducive to growth in stocks and shares. On a very basic level if investors are getting a decent interest rate in cash why would they take the risk of investing in stocks and shares? Also companies benefit from low interest rates as they can borrow money cheaply and have more potential to grow. 

Arguably we've been in a low interest rate environment since 2008, with a small Covid related blip. Some investors might be surprised by what happens to their investments if we ever go back to an extended period of high interest rates. 

Having said all that interest rates are only part of a complex story. The correlation is not 100%. 

I agree about us being in a low interest environment for a while now. A lot of media or online things make 5% and 6% being 'high' when really they're not, certainly historically at least.

Thanks for the reply, the only reason I may look further into it is if rates continue to drop. I was reading back through these posts and a few years ago some savers were under 2% (?), if it got to that point again the stocks/shares option becomes more and more appealing.

That (using interest rates) isnt necessarily the best thought process.  Savings and Investments are different things with different objectives.  It isnt an either / or situation and you use each for different reasons.  Investments are generally a long term thing - 10+ years, and savings are often a short term thing where you need fairly fast access (e.g. emergency money or money you know you will need soon).  So the choice should really be based on your financial strategy.   Then there are bonds and Gilts that diversify even further.  I have savings looking 5 years out; Indexed Linked Gilts for years 6 to 14 and equities for 15+ years.

The chances are I won't invest any sizeable amounts, its simply something I wanted a little information on. In my 50s so as you say with investments being more of a long term thing I don't want to wait years and years as life is too short. But not really knowing much about the stock market - another reason for caution - I just wanted to learn a little more.