Tackle Today: The Cost of Capital
January 19, 2022
« Why it Matters. »
Traders,
Money makes the world go round. It is the oil of the economic engine. But it’s not free – at least not usually. There’s a cost associated with borrowing it, known as the interest rate. When rates rise, getting your hands on money becomes more expensive. When rates fall, money becomes cheaper.
Think about how this impacts corporations. They need capital to fund projects and expansion. The cheaper the capital, the easier it is to turn an idea into profit. If you can borrow money at 1%, and I have to borrow at 5%, you have a considerable advantage.
For debt-ridden companies (and countries, for that matter), a small rise in rates can make a big impact on their overall debt burden. This is because more money going to servicing your debt load means less money available to finance other parts of the business, like expansion and growth.
If the cost of capital climbs too much, then a profitable project with low rates may become unprofitable. As a result, most businesses would halt the project and lay off workers. Multiply that times thousands of companies throughout the economy, and you start to see the adverse effect of rising rates.
Chart of the Day: Small-Caps Test Support Again
Small caps are once again testing the long-term support zone near $210. Somebody grab the paddles and shock this sick puppy back to life. No one wants to see the floor give way.
Video of the day: How to use Options to unleash the Power of Cost Basis Reduction
In this video, you are going to learn how using options can increase your probability of profit and reduce your cost basis.
Today’s line up
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The Coaches Show Replay
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