Money Supply

The term "money supply" isn't as popular as "inflation" or "interest rates," but it's just as important to understand. Money supply is defined as the total amount of liquid cash circulating in a country’s economy. Liquid cash includes paper currency and coins, but it also includes “cash-like instruments” such as CDs (certificates of deposit), money market funds, and overnight loans between banks.

Now, a country’s money supply is partially determined by the actions of governments, central banks, and private sector banks. The biggest determinant of money supply is typically a country’s monetary policy, which is set by a central bank like the US Federal Reserve or Bangladesh Bank.

Central banks either increase the money supply through expansionary policies or decrease the money supply through contractionary policies. When a central bank wants to expand the money supply, they will purchase short-term loans from the government with newly printed money, thereby injecting more money into circulation. To reduce the money supply, a central bank will do the opposite and sell short-term government loans, thereby removing money from circulation.

A central bank’s decision whether to increase or decrease the money supply is a way to expand the economy if they feel it is lagging too much, or to slow down the economy if they feel it is getting a bit overheated. For example, if your parents don’t want you to go to a theatre, they would decrease your pocket money (money supply).

When there’s more money in circulation, it becomes cheaper to borrow it and interest rates fall. As money is removed from circulation, borrowing becomes more expensive and interest rates rise. Lower interest rates generally increase economic activity, while higher rates tend to decrease activity.

So, how does money supply affect your stock portfolio?

When the amount of money in circulation goes up, interest rates go down. This makes businesses and consumers spend more. When people spend more, demand goes up. When the money supply goes down, the opposite happens. When interest rates go up, businesses and people spend less, demand goes down. When businesses have more money, they can grow and make their products and services better. When people have more money, they can buy more of these things, which helps businesses make more revenue. And with better earnings, the stock of the company appears lucrative to investors. Similarly, when money supply is decreased, the cycle is reversed – company earnings decrease followed by a decline in stock prices.

The term "money supply" isn't as popular as "inflation" or "interest rates," but it's just as important to understand. Money supply is defined as the total amount of liquid cash circulating in a country’s economy. Liquid cash includes paper currency and coins, but it also includes “cash-like instruments” such as CDs (certificates of deposit), money market funds, and overnight loans between banks.

Now, a country’s money supply is partially determined by the actions of governments, central banks, and private sector banks. The biggest determinant of money supply is typically a country’s monetary policy, which is set by a central bank like the US Federal Reserve or Bangladesh Bank.

Central banks either increase the money supply through expansionary policies or decrease the money supply through contractionary policies. When a central bank wants to expand the money supply, they will purchase short-term loans from the government with newly printed money, thereby injecting more money into circulation. To reduce the money supply, a central bank will do the opposite and sell short-term government loans, thereby removing money from circulation.

A central bank’s decision whether to increase or decrease the money supply is a way to expand the economy if they feel it is lagging too much, or to slow down the economy if they feel it is getting a bit overheated. For example, if your parents don’t want you to go to a theatre, they would decrease your pocket money (money supply).

When there’s more money in circulation, it becomes cheaper to borrow it and interest rates fall. As money is removed from circulation, borrowing becomes more expensive and interest rates rise. Lower interest rates generally increase economic activity, while higher rates tend to decrease activity.

So, how does money supply affect your stock portfolio?

When the amount of money in circulation goes up, interest rates go down. This makes businesses and consumers spend more. When people spend more, demand goes up. When the money supply goes down, the opposite happens. When interest rates go up, businesses and people spend less, demand goes down. When businesses have more money, they can grow and make their products and services better. When people have more money, they can buy more of these things, which helps businesses make more revenue. And with better earnings, the stock of the company appears lucrative to investors. Similarly, when money supply is decreased, the cycle is reversed – company earnings decrease followed by a decline in stock prices.