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With interest rates going higher in the near future, how will it affect penny stock investing?
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4. Hi, My name is Aaron and I‘m with Penny
Stock Research, today were reviewing our
recently published article…
6. Let’s clear something up. Interest rates
are important – even for penny stocks.
You see, interest rates are a major
variable in how well or poorly the
economy is doing.
7. That’s why the Fed has a powerful impact
on economic performance. As such, even
as penny stock investors, you don’t want
to just ignore interest rates. The overall
economy certainly impacts penny stock
companies, just like everything else.
8. On the other hand, interest rates direct
impact on penny stock performance is
going to be less than other, larger
companies.
9. I’ll get to that in a minute. First off, let’s
quickly review the current interest rate
environment. Here’s a look at what 10-
year Treasury yields has done over the
last year:
10.
11. As you can see, the yield on 10-year
bonds has basically been above 2% since
the spring. However, it hasn’t made its
way up to 2.5% yet this year. It’s been
closer to 2% than 2.5% since August.
13. Most likely, the minor slowdown in the
US economy, along with the issues in
emerging markets, will result in the Fed
keeping rates at current levels until 2016.
That means the Fed Funds rate will
remain at around 0%.
14. That also means the 10-year bond yield
will likely stick between 2% to 2.5% for
the time being. However, bond yields are
related to future expectations of rates, so
we could see a higher move in yields
15. before the Fed actually makes any
changes. Still, nothing is likely to happen
anytime soon. When rates do start to rise
– probably early to mid 2016 – it’s going
to be a slow rise.
16. We’ll mostly likely see rate hikes in
increments of 25 basis points every
couple months. The Fed will make sure
not to raise rates too quickly.
17. While small rate hikes won’t mean a
whole lot to most consumers, they could
have a large impact on the business
world. Financial companies in particular
will see very large impacts from even the
smallest changes in rates.
18. So how do interest rates impact penny
stock investing?
19. As I mentioned earlier, penny stocks can
be impacted by rates if a raise in rates
slows down the economy. A rising tide
lifts all boats, so to speak.
20. But, the Fed should raise rates at a slow
enough pace that an economic slowdown
should be avoided. What about a direct
impact?
21. Well, larger companies who have to take
on debt (or who have variable rates on
their current debt) will certainly feel the
sting of higher rates. It will make debt
more expensive. That could definitely eat
into profits.
22. Fortunately, many penny stocks don’t
have a lot of debt because they’re small
enough to get by on organic growth or
existing cash holdings. That makes low-
debt penny stock companies a good
investment in a rising rate environment.
23. After all, you probably don’t want to be
investing in heavily indebted penny
stocks anyways. It’s hard to enough to
grow a business without a major debt
burden. Additional interest rate risk is
the last thing you need to worry about.
24. In summary, it’s a good idea to
understand the interest rate environment
as it pertains to the economy as a whole.
However, the direct impact on most
penny stocks is minimal.
25. Finally, it’s probably a good idea to avoid
penny stock companies with a large
amount of debt.