As much as we evaluate every step we take when we embark on our personal investments, once youre in the middle passage, often operating forces know and act beyond our control. An example of these forces is U.S. interest rates.

But how they impact on our investments? Why is it important to know how they can affect us? While this is a topic that may seem a bit dry, as it is a commonplace that investors should make an effort to understand.

Beyond the target that we give our money, the fact understand how interest rates may affect our investments, interest and know their current levels, can function as a barometer of the weather financial environment and help promptly to reconsider the measure and manage our personal finances.

According to financial theory, interest rates, which change all the time, are essential for the evaluation of a company, and therefore play an important role in how we put the stock price. Then we will stop to examine a little this relationship between interest rates and stock prices.

Consider an interest rate as the cost of money, as the cost of production, labor and other costs, is a factor of profitability for the company.

The basic cost of money for an investor is the rate paid by Treasury notes of the United States, whose return is guaranteed by the full faith and credit of the United States government. According to financial theory, the value of a stock begins there: stocks are risky assets, even more risky than bonds because bondholders recover their capital before the equity holders in the event of bankruptcy. Therefore, investors require a higher return because of accepting additional risk in investing in stocks instead of Treasury notes.

The extra return that investors can theoretically be expected from the actions referred to his character of risk premium. Historically, the risk premium of around 7%. This means that if the rate of Treasury bills is 4%, then investors may require a return of 11% of a stock. Therefore, the total return for a stock is the sum of two parts: the risk-free rate and risk premium. If an investor wants higher returns must invest in riskier stocks.

In theory, rational investors select an investment with a return that is high enough to compensate for the lost opportunity to earn interest on the notes secured by Treasury and for accepting additional risk.

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The rate of Federal Reserve actions

Now there is another fee to take into account: the set by the Federal Reserve. This is a one year rate that the Federal Reserve (FED, the U.S. Central Bank) used to provide commercial banks. This rate is not market and its level is determined by the Fed at its monthly meeting.

But why is it important to be vigilant at this rate? There is a relationship between the benchmark rate set by the Federal Reserve and its influence on the return of the shares. And the stock market moves daily in relation to the news that comes out can estimate or guess about the activities of the Federal Reserve.

The market gives great importance to the activities of the Federal Reserve. And from a simple observation about the relationship between these two variables (the Fed rate and the return of the shares) makes it clear to us that in the short term, markets rise to low interest rates and down otherwise.

However, long term, the relationship is not so simple. In fact, one of the main mistakes made by investors is putting too much attention on a single variable as a determinant of returns.

Moreover, recent years have shown that the supposed inverse relationship between baseline rates by the Fed and long-term returns in the stock market is not as straightforward and clear as the market tends to assume. A smart investor should take the trouble to challenge the assumed truths, using their own criteria in making decisions concerning the management of its capital.

In sum, the data of interest rates provide useful information for determining the cost of investment opportunities. Be alert to U.S. rate levels can be an important factor for any successful management of personal finances and can help us determine our investment options for best results.

Thats it for today. Until next time!