Getting Ready for a Short Term Rate Hike
Right now, it seems that the Federal Reserve is having a profound impact upon the price of stocks within the U.S. They are definitely not directly related, but the low interest rates that the Fed controls has given many companies access to more funds, and this has driven profitability way up across the board. It’s been a great thing for many sectors of the U.S. economy, but there is a huge underlying question that hasn’t been answered yet: what happens when interest rates go up?
Interest rates will inevitably go back up. They are almost at 0 percent for short term loans–and companies are thriving off of this fact. This makes it very easy to take out a short term loan and grow a company quickly this way, and then pay the loan back before interest rates get out of hand. It’s a quick internal investment strategy, and for many it is extremely effective at increasing long term growth within the company. It improves immediate resources with little downside. However, there’s now no room for rates to go any lower, so the only direction they can go is up. It’s been this way since 2008, and every day that goes by ratchets up the tension a tiny bit.
Rising interest rates will make it tougher for money to be borrowed, and this will drive down stock prices amongst the companies that are using this method of growing their businesses. But it will not affect each company, so it is important to have a firm grasp on the fundamental data for the companies you trade–especially if you focus on short term trading, such as with a binary option broker. For the companies that borrow a lot, the short term impact will be felt hard as many companies will see their profit making ability decrease drastically overnight.
Short term traders typically do not focus on fundamental data, but right on most data sheets will a debt/equity ratio, and the higher this number is, the more in trouble your company of choice will be when interest rates go up. There’s obviously a lot more to the balance sheet than this small piece of information, but the D/E is an important thing to know and it needs to be accounted for somehow if a problem arises. And having to pay more on that debt than originally planned for is a big issue for some companies.
For those binary options traders that keep tabs on things of a fundamental nature, though, this also creates a huge opportunity. As you know, binary brokers do not charge extra for their equivalent of short sales, so if a company is affected by this, purchasing a string of put options can be a great idea as you ride out the short term drop in price that will happen. It’s tough to tell how long a drop will take, and it will likely need to be approached on a case by case basis. Short term binary options, such as 5 to 15 minute expiries, gives you a great pressure gauge to ride the trend, all while never risking too much since you are not sure how long a drop in the underlying asset’s price will take to come to fruition. There is also the added benefit of having the ability to take advantage of only slight changes in price this way without sacrificing profits since binaries are all or nothing. As the trend starts to slow, you can back off without major losses since it doesn’t matter by how much your prediction in direction is correct just as long as it is, in fact, correct.