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

by Brian Feroldi

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

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.

no matter what the company does with its profits, the profits belong to the shareholders.

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.

That’s why the Dow is called a price-weighted index. The dollar price of each stock is what matters, not the size of each business.

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.

Market capitalization is the current dollar value of a company’s equity. It is found by multiplying the total number of a company’s shares by the current market price of one share.

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.

The lower the P/E ratio is, the cheaper the company is to buy. The higher the P/E ratio, the more expensive a company is to buy.

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.

Optimism causes prices to rise. Pessimism causes prices to fall.

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

When earnings go up, the stock price goes up. When earnings go down, the stock price goes down.

However, over the long-term, the price of a stock always follows the earnings of the company.

In the short-term, a stock can move up or down for any number of reasons. But over the long-term, prices move up and down based on changes in earnings.

When earnings rise, the stock market rises. When earnings fall, the stock market falls.

As the holding period increases, the odds of achieving a positive return increase.

The S&P 500 has produced a positive return 100% of the time over every 20-year holding period.

when stocks are held for a long enough time period, they have delivered a positive return 100% of the time.

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.

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

In other words, as long as business profits eventually recover from a downturn, the stock market will too.