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

by Brian Feroldi

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.

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.

Best Company Coffee

By paying 20 times earnings, the buyer would be willing to accept just a 5% return on their investment

In general, 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.

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-term, the stock market can move up or down for any number of reasons. In the long-term, the stock market moves up or down based on changes in earnings. When earnings rise, the stock market rises. When earnings fall, the stock market falls.

Stock market crashes usually start when something bad happens in the world. That event causes investors to become worried that earnings are about to fall. That worry causes some investors to sell. That selling causes stock prices to fall, which causes even more investors to worry that stocks are going to fall.

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.

When tough times hit, businesses are forced to innovate and try new things. That innovation leads to new business formation. That leads to a recovery.

Second, weak businesses go belly-up in tough times, but strong businesses survive. The strong businesses eventually capture the customers of businesses that failed. That allows them to emerge stronger than ever before.

Third, the government steps in to provide assistance during downturns. This includes providing employment opportunities, direct payments, or buying goods and services from busine...

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

American businesses are aware that foreign markets hold huge potential, so they continually search for ways to sell products and services to those new consumers. As they succeed, their profits grow.

The slow increase in the world’s population gradually increases the demand for all goods and services. As businesses fill that higher demand, their profits increase.

Some companies choose to use a portion of their profits to buy their stock “back” from their investors. When this happens, the total number of shares that exist declines. This leaves all remaining shares with a slightly larger piece of the business.

This reduces the total number of shares outstanding. In turn, the earnings per share increases because the total number of shares go down.

Earnings go up over time because of the combination of inflation, productivity, innovation, international expansion, population growth, acquisitions, and stock buybacks.

Compounding occurs in the stock market because price movements are tracked in percentages, not points.

Contributions to 401(k)s are usually made through payroll deductions before taxes are paid. This lowers the employees’ taxable income and provides an immediate tax savings.

Failed to mention roth option

THE 401(K) WAS CREATED BY ACCIDENT

Forced Short-Term Focus: Many investors judge the performance of their funds over short periods of time (a year or less). If the mutual fund performs poorly during that time, then some investors will withdraw their money. When that happens, the mutual fund manager is forced to sell stocks at low prices, even if they don’t want to. The exact opposite occurs when a fund does well. Investors add money to the fund, which forces the manager to buy stocks at higher prices, even if they don’t want to. These actions force fund managers to invest for the short-term even if they want to invest for the long-term.

How do you measure financial performance and investments? Ask your financial advisor how they will measure your financial success. Ideally, it would be determined by whether or not you are on target to meet your financial goals. It might also be based on how satisfied you are as a client.

That’s because in the short-term, market prices are controlled by the collective emotions of investors.

This brings up the real problem with trying to time the market. You have to be right twice. You have to be able to sell before the big decline and buy back in before the market recovers.

also learned that good companies don’t want their stock price to trade below $5. Low stock prices signal to investors that there is something wrong with the business. A low share price could mean that the company isn’t profitable, is running low on cash, has poor business prospects, is being crushed by a competitor, or is facing a number of other problems.

When a company has a very high dividend yield—say, over 5%—it is often because other investors are worried that the company can no longer afford to make its dividend payments. That worry caused the share price to decline, which in turn caused the dividend yield to rise.

Some ESPPs also have a “look-back” provision. This means that the employee can purchase shares based on the lowest market price during the offering period.

In 1913, politicians decided that action needed to be taken to reduce the economy’s volatility. The U.S. government passed the Federal Reserve Act, which created the Federal Reserve Bank (which is commonly called “the Fed”).

The primary tool that it has to manage both is the control over interest rates. Specifically, the federal funds rate. This is the interest rate that banks charge each other to borrow money.