Interest Rates, Stock Markets, and Financial Intermediaries: An Analysis
The Influence of Interest Rates
How do interest rates impact investments? When interest rates decrease, returns on deposits and fixed-income securities diminish. Consequently, investors often seek higher returns in equities, increasing demand for shares and driving up prices. Conversely, when interest rates rise, investors shift towards safer, higher-yielding investments, selling their shares and creating an oversupply that lowers prices. These markets are interconnected; a well-functioning secondary market enhances the liquidity of securities.
Expectations and global events significantly influence the primary market. Fixed-income assets are generally safe if held until maturity. However, if sold before maturity and interest rates have increased, they become less attractive to buyers. For example, a bond bought at 4% will be less appealing if new bonds are issued at 6%.
Stock Indices
Stock indices reflect the price evolution of traded securities. Key indices include the Dow Jones in New York, the Nikkei in Tokyo, and the IBEX 35 in Spain. The performance of companies with significant weight in an index can cause substantial fluctuations. In Spain, companies like Santander, Telefónica, BBVA, Endesa, Iberdrola, and Repsol IPF have a combined weight of 60% in the IBEX 35.
Nominal vs. Real Interest Rates
Consider a one-year bond with a 4% nominal interest rate. An investment of €100 would yield €104 after a year. However, if inflation is 2%, the real value of goods worth €100 today will be €102 next year. Therefore, the real gain is only €2 (€104 – €102). Thus, real interest rate is nominal interest rate minus inflation.
Financial Intermediaries
Financial intermediaries are classified into two main groups:
Banking Intermediaries
- Banks: Private, profit-driven companies.
- Savings Banks: Non-profit organizations that allocate profits to social causes.
- Credit Cooperatives: Focus on financing agriculture and improving rural living conditions.
Non-Banking Intermediaries
- ICO (Official Credit Institute)
- Corporations and Investment Funds
- Pension Funds
- Insurance Companies
- Leasing Companies
- Factoring Companies
- Venture Capital Firms
Common financial assets include stocks, bonds, treasury bills, and investment fund shares.
The Stock Market
The stock market is a key component of the financial system. In Spain, it is regulated by the Securities Market Act and overseen by The National Securities Market Commission (CNMV), which ensures transparency and investor protection.
Primary and Secondary Markets
The stock market is divided into:
- Primary Market: Newly issued securities are sold for the first time. This is called a placement of securities and is done through financial intermediaries.
- Secondary Market: Existing securities are traded among investors. The stock exchange is the most important and organized secondary market.
The continuous market for stock shares operates from 9 am to 5:30 pm, Monday through Friday. Stock prices are determined by supply and demand. Both markets are closely linked, with a well-functioning secondary market facilitating the liquidity of securities. Market expectations and global events influence the primary market.