It sure doesn’t feel like it in 2022, but the stock market in the United States generally goes up. On any given day, it’s virtually a coin flip whether the market ends higher or lower. But over long periods of time, the trajectory is unmistakable: a chart of the U.S. stock market goes up and to the right.
It always has and likely always will.
But why does the market go up? It’s not like angels from on high came down at some point and touched the trading floor of 11 Wall Street in New York, consecrating the space where securities are bought and sold. No, the reason the stock market goes up isn’t mystical at all.
Some people think the stock market is akin to a casino. You throw your chips down and hope luck falls in your favor. But that’s not at all how the stock market works.
Casinos prosper on probabilities. Stocks, however, thrive on population and productivity.
A casino operator knows that the “house” must win only slightly more than half of the time to make a lot of money. It’s all about probabilities. But with stocks, it comes down to companies hiring good people to make great products and services that other people want to buy.
Remember, stocks are just claims on a company. They represent ownership. The more stock of a company you purchase, the more of that company you own. If the company does well, other people will likely offer you more for your shares than you paid – or the company may send you dividend checks that you can use to make your life better. If the company does poorly, it will be more difficult to find a buyer for your shares, and your investment in the company will likely fall in value.
The stock market is simply a convenient way for all of us to buy and sell shares of companies with one another.
So, why does the stock market go up? Because the companies in the stock market become more valuable. It’s all about population and productivity.
As the population increases – or companies enter new markets, creating more demand – they sell to more customers. This, in turn, makes more money for the company. As the money pours in, more people want to own a piece of the company, increasing the value of its stock.
Likewise, as productivity increases, companies produce more output with fewer inputs. This efficiency is valuable. Productivity allows companies to do more with less. As a result, companies keep more of the money they make. And that entices people to pay more for the company’s stock.
Plus, there are new companies being born every day. While the investing community is often obsessed with the fear of the day – inflation, recession, Ukraine, the president – somewhere there is someone who doesn’t care.
Somewhere, there is an engineer creating the next breakthrough technology.
Somewhere, there is a scientist concocting the next life-saving medication. Somewhere, there is a college kid coding the next must-have software application.
These people are creating, concocting, and coding regardless of how the economy is performing, regardless of what politicians are saying, and regardless of what is happening outside our borders. The only thing they care about is the challenge in front of them. The fact that they stand to make millions – if not billions – of dollars if they are successful surely doesn’t hurt.
The reason the stock market works is because our market economy unleashes creative minds. It gives inventors the freedom to dream and build. It gives entrepreneurs a financial incentive to push through setbacks and strife.
When humans tap into their creativity, astonishing things come to life. These things make our lives better. They may make us more productive. They may even bring us joy or extend our lives. Because of that, these things are valuable. And if you are an investor in the company creating that value, you can gain tremendous wealth.
As long as human ingenuity continues – and our market economy persists – the stock market will increase in value because people will continually create newer and better products and services.
Owning stocks gives you a piece of that action.
Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at justin.lueger@invisorgroup.com.