Why Does The Stock Market Go Up?: Everything You Should Have Been Taught About Investing In School, But Weren't

by Brian Feroldi

because the stock market is the greatest wealth creation machine of all time.

greatest? Hmm. No. Maybe is one of the ways to acquire wealth passively. IMO The greatest should be build scalable and profitable business.

It has helped millions of ordinary people to build wealth and reach their financial goals.

If you don’t understand why the stock market goes up, then you won’t know why it crashes sometimes or why it has always bounced back.

The stock market is the greatest wealth creation machine of all time.

Money determines where you live, the food that you eat, the education that your children receive, the healthcare you can access, the life experiences you can have, and much, much more.

Interesting POV.

A stock represents partial ownership of a corporation. The owners of the stock are called ‘stockholders’ or ‘shareholders’.

A dividend is when a company gives some of its profits—which are also called ‘earnings’ or ‘net income’—back to its shareholders.

That is why stocks have value. When you own a stock, you have a legal claim on a portion of a company’s assets and profits. If that business makes money, then that money belongs to the shareholders.

The Dow Jones Industrial Average is what’s known as a stock market index. An index is a group of stocks that are combined to figure out whether the stock market as a whole is going up or down. It is a way to track the performance of the stock market.

S&P judged the size of each business by using its market capitalization, which is the total dollar market value of a company’s equity. This is called a capitalization-weighted index.

A quick way to figure out how many years it will take you to double your money is to use The Rule of 72. Simply divide 72 by the annual interest rate. The result is the number of years that it will take you to double your money.

Like the S&P 500, the NASDAQ Composite Index is a capitalization-weighted index. This means that larger companies have a bigger influence over the movement of the NASDAQ Composite Index than smaller companies.

This is the primary reason why companies go public: to raise money. That money could be used to hire workers, buy equipment, pay off debt, or for many other things.

The downside to going public is that the original owners no longer own 100% of the business. Natalie, Ethan, and Lauren only own half of Best Coffee Company after it went public in this example. This is because of an effect called dilution.

In the event of a sale, the investor who sold the stock gets the money, not Best Coffee Company.

There’s only one reason why investors buy stock: to make money.

The first way is to buy the stock for one price and then sell it at a higher price.

dividend is when a company chooses to give some of its profits back to its shareholders in the form of a cash payment.

At any given time, investors determine what a business is worth based on two primary factors: 1.How much profit a company is expected to earn in the future. 2.How much investors are willing to pay to buy those earnings today.

Determine the worth of companies 1. How the profit the company will earn in the future. 2. How much investors are willing to pay today?

For example, if a company is growing rapidly but doesn’t yet have any earnings, the P/E ratio won’t be helpful.

The price of a stock is determined by how much profit a business is expected to make in the future and how much investors are willing to pay now to own those future profits.

A business that is growing is worth more than a business that is not growing.

I see. why?

In general, when bad news comes along, buyers are less willing to buy stocks. They demand a lower P/E ratio, which causes the share price to fall.

when good news comes along, investors are more eager to buy stocks. They are willing to pay a higher P/E ratio, which causes the share price to rise.

Importantly, in both theoretical examples, Best Coffee Company was the same business producing $20,000 in profits each year (or $1 in earnings per share). However, news came along that changed buyers’ and sellers’ perception about the future profits of Best Coffee Company. The P/E ratio—and the share price—moved up and down in response.

This is the most common reason why stocks move up and down each day. They move based on how investors as a group feel on any given day.

This is why a stock goes up over the long term. The share price follows changes in earnings.

“In the short run, the market is like a voting machine—tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine—assessing the substance of a company.”

So this is the answer why we should invest in great companies for the long term

Every now and then the stock market experiences a big decline. When this happens, it is called a market “crash”.

What’s important to know is that stock market crashes are nothing new. They are a normal part of investing.

First, tough times force companies, workers, and entrepreneurs to try new things. They abandon old business practices and adopt new ones. They begin to experiment with new technologies.

There are several forces that work together to drive earnings up over time. Those forces are: 1.Inflation 2.Productivity 3.Innovation 4.International expansion 5.Population growth 6.Acquisitions 7.Stock buybacks

Inflation occurs because money slowly loses its buying power over time.

Productivity means that humans find new ways to produce more goods and services with the same (or fewer) inputs.

What makes the stock market so powerful is that it compounds an investor’s money over time.

The secret to earning huge returns is to invest your money for as long as possible.

index funds are the best choice for most investors.

If the idea of researching and buying individual stocks interests you, go for it. If not, just stick with index funds

the best time to invest is when the economy is doing terribly.

Sept 2022. The economy is terrible. So according to this idea, I need to continuously investing.

This is why it’s a terrible idea to stop investing when the economy is doing badly. If anything, you should try to invest more.

Many investors try to predict the stock market’s high and low points. This is called “timing the market.”

What matters is how much capital you have invested in a company and whether the company is worth owning in the first place.

I’ve since learned that if an investment is going up and the opportunity ahead is still huge, don’t be in a rush to sell.

Every investor has their own unique set of goals, risk tolerance, and time horizon. The goal of asset allocation is to optimize the portfolio’s risk and reward dynamics to best match the investor’s needs.

In general, the younger the investor, the more aggressive they should be. The older the investor, the less aggressive they should be.

Rebalancing your portfolio can help to ensure that your asset allocation matches your risk tolerance level.

Vesting periods are designed to incentivize employees to stay with the employer for a long period of time.

The key point to remember is this: stock splits do not create any value for investors.

If you’re just starting out, focus most of your effort on growing your income and living frugally.

Over time, your savings rate will grow, and you’ll have much more money to invest.