Rising and falling interest rates offer a special risk to stock investors. Historically, rising interest rates have had an adverse effect on stock prices. Hurting a company’s financial condition. Rising interest rates have a negative impact on companies that carry a large current debt load or that need to take on more debt because when interest rates rise, the cost of borrowing money rises, too. Ultimately, the company’s profitability and ability to grow are reduced. When a company’s profits (or earnings) drop, its stock becomes less desirable, and its stock price falls.

Affecting a company’s customers

A company’s success comes when it sells its products or services. But what happens if increased interest rates negatively impact its customers (specifically, other companies that buy from it)? The financial health of its customers directly affects the company’s ability to grow sales and earnings. For a good example of this situation, consider what happened to Cisco Systems in 2000.

Because a huge part of its sales went to the telecommunications industry, Cisco’s profitability depended on the health of that entire industry. The telecom industry’s debt ballooned to $700 billion. This debt became the telecom industry’s financial Achilles heel, which, in turn, became a pain in the neck to Cisco. Because telecom companies bought less (especially from Cisco), Cisco’s profits shrank. From March 2000 to March 2001, Cisco’s stock fell by nearly 70 percent! As of September 2001, Cisco’s stock price continued to decline because the companies that were Cisco’s customers were hurting financially. Impacting investors’ decision-making considerations

When interest rates rise, investors start to rethink their investment strategies, resulting in one of two outcomes:

- Investors may sell any shares in interest-sensitive stocks that they hold. Interest-sensitive industries include electric utilities, real estate, and the financial sector. Although increased interest rates can hurt these sectors, the reverse is also generally true. Falling interest rates boost the same industries. Keep in mind that interest rate changes affect some industries more than others.