Yesterday was a huge day for stock market. Dow Jones has jumped 336 points, after Fed’s lowered the interest rate by half points. This was the biggest one day gain for Dow Jones in the last five years. And I am expecting markets to finish higher today as well.

Considering that most of you who read my blog are beginner investors, I will briefly explain why lowering the interest rate had such a dramatic, but positive effect on the stock market. Although interest rate and stock markets are not in direct relation, decrease in interest rates almost always reflects in stock markets going up. But why?

First of all, people who have their money in bonds and securities are now getting less back, because of lowered interest rates. So, they will usually reinvest that money into stock market. Higher demand will usually result in prices going up.

Lower interest rates give businesses more borrowing power. With more money on hand they can finance their future expansion, at lower rates, thus increasing the possible returns for investors. With economy expected to grow, more people are willing to invest their money into stock market. And on top of everything, most investors have expected a quarter points cut. Fed’s have decided to cut down interest rate by half points, which exceeded the expectations of most investors.

To sum it up, low interest rates are usually introduced when economy needs a boost, if unemployment is too high, and inflation low. Therefore lowering interest rates will give the economy a boost, but will usually result in inflation.