Educational articles

Why does the stock market rally when there is an interest rate cut?

by

On 1 October 2019, the Reserve Bank of Australia (RBA) decided to cut the cash rate to 0.75%. This is the lowest in Australian history. On the day of the news, the share market rallied. This has often happened on the back of interest rate cuts. If the RBA is cutting rates because of problems with the economy, then why does the share market rally? Why is it a positive for stocks? Borrowing cost of companies When interest rates are …

Read MoreWhy does the stock market rally when there is an interest rate cut?

What are the effects of higher oil prices?

by

Oil price sentiment was recently thrown in disarray because of the oil field attacks in Saudi Arabia. The price of oil momentarily jumped higher as fears emerged there may be a shortage of fuel. Rising oil prices can cause inflation and cripple economic growth. In this article we discuss what can happen when the price of oil rises. Pros Higher Share Prices A higher oil price is good for oil suppliers and energy companies. It becomes a positive for their …

Read MoreWhat are the effects of higher oil prices?

Are ETFs causing a bubble?

by

ETFs have become hugely popular recently as they can offer portfolio diversification at a very low fee. However Michael Burry, as portrayed in the “The Big Short” and who predicted the subprime mortgage crisis thinks there is a bubble brewing in passive investing with ETFs. In this article we discuss the impacts of ETFS on the stock markets. What is an ETF? It is a fund which usually holds multiple stocks and tracks an asset class or an index traded …

Read MoreAre ETFs causing a bubble?

Why is the AUD dollar going down?

by

The Australian dollar has fallen to its lowest level in 10 years. The price of the Australian dollar is simply driven by demand and supply. Price goes down when the demand is low and price goes up when demand goes up. So why has demand been falling for Australian dollars? Interest Rates The US cash rate is 2.5% and Australian interest rates are only 1% at the moment. The Reserve Bank of Australia (RBA) is considering further interest rate cuts. …

Read MoreWhy is the AUD dollar going down?

Why inflation is good for the economy

by

High inflation has often been considered harmful to the economy. However, it is deflation which can be more harmful to the economy. Economist John Meynard Keynes believed that some inflation was needed to encourage consumers to spend and prevent the paradox of thrift. The paradox of thrift is detrimental to the economy. This is because savings prevents consumers from spending and the economy from growing. Deflation can be a bad for the economy Deflation occurs when all prices fall. Simultaneous …

Read MoreWhy inflation is good for the economy